In his three-part video series, The Three Great Secrets for Breakout Profits, Chief Investment Strategist Alexander Green shares with investors the market-beating strategies behind his most profitable wins.
And these are strategies you can trust… Over the past 20 years, Alex’s trading research services have cumulatively outperformed the S&P 500 by more than 400%.
One of the annoying and scary things about investing is that sometimes our investments lose money. Everybody who’s ever invested money has lost something at some point.
But the most important thing isn’t that we’ve lost money… it’s what we do about it when we do. And that’s where mastery, experience and skill – and good advice – come in.
My friends Nick and Donna told me one day about a time when their business had taken a huge hit. It was a couple of decades earlier, and it was a hard time for them. They had to face things they didn’t want to, had to cut things they really didn’t want to and were forced to look at the hard truth of their situation in order to take clear, effective action.
It also took some time, and though it wasn’t much fun, they referred to that time as a “fertile trough.”
The “trough” of course was the loss. The “fertile” part was how much they learned and grew from the situation. In the telling, it was striking how much joy and pride they took in recounting that time and how grateful they were for what had seemed to be an awful development.
From that loss they grew their business tenfold and improved their lives in ways they never would have even known they could do otherwise.
Short term it was painful; long term it was essential. But they had to face it clearly and honestly for the good things to come of it.
That’s not so easy to do, because there are mistakes in our thinking that we all tend to make about such things.
Daniel Kahneman and Amos Tversky built their careers on studying and understanding these thinking mistakes. Kahneman won the Nobel Prize in economics for that work in 2002 (Tversky had passed away or he would’ve shared the prize with Kahneman – you can win a Nobel Prize only if you’re alive to accept it).
One of the consistent patterns they found is that a loss had 2 1/2 times the emotional impact of a gain. So, as much as we enjoy when our investments succeed, we hurt 2 1/2 times as much when they don’t.
This can lead us to hold on to bad investments or throw good money at our bad investments, trying to salvage what in reality is a lost cause.
Try this thought experiment from one of Kahneman and Tversky’s examples…
Imagine being faced with a choice of accepting a certain loss of $7,500, or a 75% chance of losing $10,000 and a 25% chance of losing nothing. Which would you choose?
Statistically, the odds of losing $7,500 are exactly the same, but most people will choose the second option with the hope of avoiding any loss at all.
Believing, on an emotional level, that they could avoid this loss is a powerful force, which can sometimes lead to disaster.
The big motivator that gets in the way of acknowledging, accepting and rationally acting on an economic loss is not fear, not greed… but hope. We don’t want to let go of the possibility that things could somehow turn around and we could avoid the loss entirely.
Maybe, just maybe, if we hold on to that bad investment, things will change – the economy will improve, the new product the company has been counting on will come through, the new CEO will turn things around or, somehow, someway, luck will change in our favor – and the value of that investment will recover.
Loss is one of the main causes of depression – loss of a loved one, loss of a job, loss of a lifestyle…
When we suffer a loss, it’s natural for our mood system to lower our energy so that we can reassess things, make necessary changes, and find ways to adapt and carry on. This is a natural, healthy process – if we pay attention to it. It’s a source of important information about our situation – the fertilizer, if you will, for the trough of our loss.
When we lose money on an investment, it’s a time to reassess that investment, to look harder at the fundamentals and to make decisions on what to do next.
It’s not the time to deny the reality, avert our eyes and hope for the best.
Our investments are the practical embodiment of our financial goals and vision. They allow us to hope for better times ahead – even when things are already pretty darned good. It’s natural to want things to go well, to have the best-case scenario unfold.
But when things don’t go the way we want, it’s essential that we look that reality straight in the eyes and assess that investment realistically, let go of our attachment to it, and consider what the best option will be over time.
Sometimes that means selling something we had high hopes for. Sometimes that means selling something at a painful loss.
But if selling is the right move, then it’s the right move. If we can use the remaining money from a bad investment to buy a much better investment, then that’s what we should do – that may be the start of an important gain.
Our emotions cannot be our guide because our emotions will tell us to hold on – to keep hope alive – so we can avoid that painful moment when we sell what we had rationalized as only a “paper loss” and really, genuinely, no longer have that money.
Rather than saying that we’ve lost that money, it may help in those cases to think that what we’re doing is transferring the existing capital from one investment to another. There’s nothing wrong with framing things in a better light if it gets us to take the right action.
The truth, of course, is nobody wants to lose. The essential thing is to think clearly and honestly when there’s a loss.
Knowing the kind of thinking mistakes that can throw us off can help us turn a painful loss into a fertile trough and allow our overall portfolio – and our quality of life – to grow and flourish.