It is part of human nature to have an unconscious conflict of interest that may lead one to act against their best interests. Recognizing this is crucial for taking the necessary steps to protect financial well-being.
In matters of money, when losses occur, whether in the stock market or personal endeavors, the normal tendency is to wait to recoup the losses. In extreme cases, I have seen "selling the loser" as a pejorative. This is an ingrained aspect of human behavior. However, it is a mistake. Therefore, one of the important principles of my investment partnership (ASIP), in the words of Mr. Warren Buffett, is
"You don't have to make it back the way you lost it"
A good example of this tendency comes from the gambling world. In the first place, indulging in gambling or speculation in the stock market in itself is self-defeating because mathematical odds are not in the gambler's favor. Yet many people participate in it. When they lose money, the urge to "break even" drives them to gamble more money, resulting in higher odds of even greater losses.
How to guard against this behavior in investing?
1) Recognize Red Flags
When negative signals in the business suggest the original investment thesis is no longer valid, it might be time to sell. I discussed one such red flag in my last post.
2) Stay Unemotional
A stock in the portfolio doesn't "remember" its purchase price! In the event of loss, thinking it could get back to the cost basis is futile. Even if there isn't a big loss but the stock is flat for a few years, there is an opportunity cost. Thus, it is important to think objectively, why the investment thesis hasn't worked.
3) Bite the Bullet
Accept mistakes, take the loss, and be confident to make a better investment next time by not repeating the mistake.
In summary, a crucial part of my investment process is quickly selling a stock, even at a loss, when I realize I've made a mistake. I aim to avoid becoming my own obstacle. In the words of prophet Benjamin Graham: "The investor's chief problem, and even his worst enemy, is likely to be himself."
Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).
