Investing inevitably brings losses. As long as you are ready, and have a plan for dealing with them, losses are but an opportunity to learn and grow as an investor.
Don’t panic
The famous investor Mark Spitznagel has in his book “The Dao Of Capital” described how tactic one-point losses in the bond pit were but steps along the way of a strategy leading predictably to recurring 5-point, 10-point or higher order profits.
In value investing, the underlying strategy of paying less for assets than they can expect to produce means time works in your favor. Any loss on paper would only be temporary, and actually an opportunity to increase your holding, given your initial analysis were correct.
If you’re adhering to a trend following, or similar Technical Analysis based strategy, knowing when to take a stop loss (and de facto doing it) is critical.
No matter the source of your losses, be it bad luck, poor execution or sub-par analysis, the losses per se are not that important (unless they are total); it’s the post-mortem action you take and what you can learn from them that count.
I am currently in the process of going through and explaining some of my most important insights from that time. Taken together I believe they will make for a useful inspirational reminder for enhancing your investment habits.
Resilience means gaining from adversity, being antifragile, learning from losses and coming back even stronger and more knowledgeable.
It means understanding losses will occur for every investor. It means preparing for those losses. It means knowing beforehand how to deal with losses when they occur. It means understanding your thinking can change radically when going from an ordinary situation to one of losses and a sense of urgency, and how to prepare for that cognitive shift.
Kübler-Ross’s model for the psychological reactions to adversity lists Denial, Anger, Bargaining, Depression and Acceptance. As an investor you should strive to get through to Acceptance as soon as possible, preferably skipping all the other stages altogether.
My advice is to deal with just one issue at a time. Identify exactly what is wrong, which positions. Then start with just one of them. Often, divesting the entire position is the best you can do. Sure, it will cost you the spread and commission. It may also prove to be a poorly timed decision. However, in any case, not having the position anymore means a guarantee of no more losses, and room to think rationally about what the next step should be.
Remember to inspect the ashes
thoroughly
before rising again
After dealing with a loss, update your investment commonplace with a detailed note about why the position was initiated, what made you keep it, why you incurred losses, why you didn’t get out sooner, what you plausibly could have done differently, what the actual lesson learned was.
Ultimately, you want every loss to make you a better investor; always calm, composed and rational in the face of calamity.
Prepare for losses
Deal with losses as directly and quickly as possible
Learn and grow from your losses through scrutiny and commonplacing
Resilience
Investing is so much more than a numbers game.
It’s typically not about being the best mathematician or statistician, not about making the best macro or micro forecasts, not about being the best earnings announcements trader or profiting from special situations.
No, investing is often mostly a game of psychology.
If and when you are struck by losses, you need to avoid panicking, need to accept the losses as quickly as possible in order to stop the hemorrhaging and start looking for remedies, perhaps even turning the current bloodshed into an opportunity.
Most of all you want to learn from the process and build on the foundation for more profits and less losses in the future.
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“Remember to inspect the ashes
thoroughly
before rising again”
people need to understand how powerful this is. You often hear about “failing fast” in silicone valley. That’s true. You don’t want to be on a sinking ship for very long.
However, if you don’t learn anything from your failure, it doesn’t matter.
Investigate your ashes. Then fly. You will undoubtedly need whatever caused you to burn up in the first place.