Skip to main content

Cutting Your Investment Losses

The difference between where you are and where you want to be is the pain you are unwilling to endure. Microcap investing isn't easy. If you aren't prepared to lose money while the market educates you, then you will never learn and succeed. Unfortunately, investing's greatest lessons can't be taught in a book or in a classroom. They have to be experienced and often times the teacher is loss.

My early investing career was very painful. I learned by making and losing money over and over again. The road to success isnt paved in gold. It is paved in blood, sweat, and tears. Losing money over and over wasnt fun, but there was no way of getting around these painful lessons. An investor must experience the emotional highs and lows for themselves before they can exploit those same emotions in others. Here is a chart of my maturation as an investor over the last 15 years:

My first big winner (the first spike on the chart) was a 15- bagger and it was 95% luck. The bad part of early success is you think it's skill. You get over confident and the market takes its money back. This is when most people just give up. Those that persevere will go through this a few more times each time learning something and forging an investment philosophy around their experiences. Eventually you start losing less money.

The reason why there aren't many great investors is successful investing is difficult. It is the opposite of human nature. It is hard to discipline your mind in such a way. You are only as strong as you are honest. It's human nature to blame others for your misfortunes in life and investing, but your best bet for a successful future is to fully own your past mistakes. If you blame others for your investment mistakes it is the same as admitting you didn't do enough of your own work. But even more importantly when you blame others you wont learn from your mistakes.

In 2010 my investment philosophy got a little sloppy and I made a series of bad investments and lost $600,000 over a 12-month period of time. In the months that followed I became very bitter and blamed everyone and everything but myself. It was easier to blame others than to look in the mirror. Investing is like golf; there is no one to blame for your score but yourself. I hit my own golf ball. I place my own trades. When I fully owned my losses, I learned from them, and slowly climbed back out of the hole.

Rule #1: Fully Own Your Past Mistakes.

'Take your losses quickly and your profits slowly because your objective is not just to be right but to make big money when you are right" - William O'Neil

The key to building wealth isn't just investing in great companies early, it's also cutting your losses early. Warren Buffett's famous quote "Rule No.1: Never lose money. Rule No.2: Never forget rule No.1." I think many read that quote and think, "Well duh, of course I don't want to lose money. Thanks for that brilliant advice." It is a simple concept, but I want to take it a step further. To illustrate, if you're down 50% in Year 1, you need to be up 100% in year 2 just to be back to break-even. You need to stay away from big losses because it takes a long time to bounce back from them. If you take a big loss one year it could take you a few years to get back to break-even. Those are precious years that you could be building capital instead of just getting back to break-even. Perhaps you could have retired five years sooner or became a full time investor years earlier. Big mistakes not only cost you financially but also cost you time. Time is one thing we cant get back. Andrew Stanton says "Be wrong as fast as you can". We investors are going to be wrong, and we are going to lose money from time to time.

The key is Rule #2: Take Your Losses Quickly.

It is human nature that pushes us to sell our winners and hold onto and/or buy more of our losers. Investors normally have an anchoring bias towards their cost basis. If you own two stocks both of which you have an initial cost basis of $1 per share and one now trades at $1.25 and the other at $0.75 human nature pushes you to sell the winner to buy more of the loser. Something in all of us says, "I want to average down on my losers so I can break even quicker". In most cases you should be doing the opposite, selling your losers and buying more of your winners.

Rule #3: Work on Eliminating Anchoring Biases.

Cutting your losses quickly can be hard especially if you are a concentrated investor. Its why I'm a big proponent of scaling into a position. I want to buy more as management and the business prove themselves. I love averaging up. I'm a concentrated investor and invest in a total of 5-7 companies. I am not perfect and don't expect perfection. I fully expect one, two, even three of my positions to be losers. I just don't know which ones. Living in this reality lets me work in a state of "Productive Paranoia" (read Great By Choice). The more concentrated and larger your investments in illiquid companies the more important it is to know your positions better than most. Spend twice as much time knowing what you own versus new ideas. What you don't own can't hurt you. As soon as I see cracks forming in the facade of my investment thesis, I start to sell. I cannot afford to wait until it is obvious to the masses. Limiting losses is just as important as fully realizing gains.

Rule #4: Know Your Positions Better Than Most.

Taking big losses is not only detrimental to your wealth but also to your psyche and confidence. After a big loss your confidence is shattered which slows your thinking and leaves you second-guessing your decisions. When you are Waiting For Your Pitch, you need to be able to make disciplined and timely decisions. In bear markets, pitches can look like softballs (more ideas and less competition for ideas) giving you ample time to swing. In bull markets you get less pitches and the ones that are thrown look like 102 mph fastballs. You have much less time to swing the bat. You cant be second-guessing yourself and your abilities.

Rule #5: Don't Lose Your Confidence.

"Analysis of over 25,000 men and women who had experienced failure disclosed the fact that lack of decision was near the head of the list of the thiry-one major causes of failure. Procrastination, the opposite of decision, is a common enemy which practically every man must conquer." - Napoleon Hill

Dont be too hard on yourself after your losses or you might be tempted to give yourself too much credit after your winners. You must control your ego while also not giving into your fear of failure. When you are sitting on a loser and you keep averaging down its your ego that says "I have to be right, keep buying", but the scoreboard says you are wrong. When I get in this mindset I need to remind myself that being broke and right is the same thing as being wrong. Investing is hard and no one is perfect. Fully own your mistakes so you can learn from them. When you know your positions better than most you'll know when to sell. Take your losses quickly when they are still small and you will be amazed at how quickly you can compound your capital.

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

Invest in Tax Saver Mutual Funds Online -

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

---------------------------------------------

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Popular posts from this blog

JP Morgan India Equity Fund Online

Invest JP Morgan India Equity Fund Online     JPMorgan Mutual Fund   has announced dividend under the following schemes:   The record date has been fixed as March 17, 2016.   Scheme Dividend ( R /unit) JP Morgan India Equity-D 0.18 JP Morgan India Equity Direct-D 0.18                         ----------------------------------------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saving Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in india for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Franklin India TaxShield 4. ICICI Prudential Long Term Equity Fund 5. IDFC Tax Advantage (ELSS) Fund 6. Birla Sun Life Tax Relief 96 7. DSP BlackRock Tax Saver Fund 8. Reliance Tax Saver (ELSS) Fund 9. Religare Tax Plan 10. Birla Sun Life Tax Plan Invest in Best Performing 2016 Tax Saver Mutual Funds Online Invest Online Download Application Forms For further informa...

Inflation Indexed National Savings Securities - Tax Treatment

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   Inflation Indexed Bond - Tax Treatment Tax treatment on interest and principal repayment would be as per the extant taxation provision. The quoting of Permanent Account Number (PAN) mandatory for investment amounting to `50,000 (Rupee fifty thousand) and more. However, following exemptions with regard to PAN requirement will apply: As per Income Tax Rule 114B, any person who does not have a PAN and who enters into any specified transaction shall make a declaration in Form No.60. As per Rule 114C, the requirement of PAN is not applicable to the person who has agriculture income and does not have any other income provided he makes a declaration in Form 61, non-residents as referred to in Section 2(30) of the Income Tax Act, and...

DSP BlackRock MidCap Fund

Best SIP Funds Online   HOW HAS DSP BlackRock Small & Mid Cap Fund PERFORMED? With a 10-year return of 14.61%, the fund has outperformed both the category average (12.34%) and the benchmark (10%) by a good margin. Should you invest in DSP BlackRock Small & Mid Cap Fund? This fund invests predominantly in mid-cap stocks but takes a sizeable exposure in small-caps as well. The focus is on nascent companies with high growth potential. The fund manager places emphasis on quality and avoids inferior businesses even if these look tempting from a valuation perspective. Over the past year, the fund portfolio has grown, having added to some of the underperforming sectors like chemicals and healthcare. Its portfolio churn has come down significantly. The heavily diversified portfolio is run completely agnostic of its benchmark index— most bets are from outside the index—which can at times lead to bouts of underperformance as seen in the recent years....

Investing in Birla Sun Life Emerging Leaders Fund Series Online

  Buy Birla Sun Life Emerging Leaders Fund Series Online       Market volatility has opened doors to yet another opportunity for your customers. Here's your chance, once again, to ensure they capitalise on it! The current situation!   Earning trajectories of Small and Mid-cap stocks have shown an uptick across broader markets. (Source: MoSL).   A rise in disposable income has brought about a noticeable shift in the spending habits of the consumer. The pick-up in real urban wage growth has reported to be the fastest in 7 years (Source: RBI, Labour Bureau).   According to the 7 th Pay Commission, a staggering 24.8 million Government employees to be given a sizeable hike (Source: GoI, Spark Capital).     Birla Sun Life Emerging Leaders Fund - Series 7 (A Close ended Equity Scheme). With a tenure of 3.5 years and an aim to primarily invest in Small and Mid-cap stocks, it targets to identify the potential leaders of tomorrow.       Mutual Fund investments are subj...

PSU insurers withdraw no-claim bonus benefit on health insurance

Start Saving for Tax 2018 by Investing in ELSS Funds Online Policyholders are starting to feel the pinch of steadily increasing health insurance premiums. To make matters worse, some PSU insurance providers are withdrawing benefits such as no-claim bonus (NCB) and family bonus. However, there has not been any major exclusion by private insurers in terms of extended benefits of NCB and family cover discounts. So should you switch? Here are the pros and cons.   Should you port your policy?   Private insurance companies like Aditya Birla Health Insurance and HDFC Ergo General Insurance provide NCB and family discount in floater for more than two or more individuals. Similar benefits are offered by Cigna TTK and SBI General insurance.   While porting is always an option, there are a few issues to consider. Subramanyam Bhrahmajosyula, Head, Underwriting & Reinsurance, SBI General Insurance, says, Keep in mind that the company you're porting to is not obliged to match the premium or ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now