I’m convinced that learning to take a loss gracefully is the single best skill you can develop as an investor.
George Soros does it like a champ. In the legendary hedge funder’s own words: “I’m only rich because I know when I’m wrong. I basically have survived by recognizing my mistakes.”
Think about that. George Soros has every right to say, “I’m rich because I’m smart and I’ve made wise investments.” Nobody could argue with him or his track record.
But instead, he credits most of his success to his ability to take a loss gracefully. He knows he’s not perfect. He knows he’ll make plenty of trades that go sour. He knows he’ll have some down months. And he simply accepts these facts as the investment game’s “cost of doing business.
Soros doesn’t take losses personally. He doesn’t let a loss affect his ego or get him feeling depressed. He just takes the loss and moves on. He’s unemotional about it. And that allows him to stay in the game and, ultimately, make a profit.
Most people assume that legendary investors like Soros and Buffett have some “special power”… something they were graced with at birth… something that ordinary people, like me and you, will never have.
But I don’t buy that…
Soros and Buffett just know how to take a loss gracefully.
And that’s a behavioral skill. One that you too can develop as easily as they have.
First, Admit There’s a Problem
Psychologists say that the first step in fixing a problem is admitting the problem exists.
Most investors have a hard time doing this. We find it difficult to acknowledge the fact that we’ll take many, many losses throughout our investing lifetime. We also have a hard time admitting just how emotionally draining those losses can be (and that our emotions will make us do stupid things).
So, the first step in learning how to take a loss gracefully, like Soros and Buffett, is to admit that losses are inevitable.
Here’s a contract that you can sign for yourself. It may help you acknowledge and internalize this fact.
I, (name), recognize that all investments carry risk. I know it’s impossible to invest without taking risk.
Some investments will generate profits. Some investments will result in losses. It’s impossible for me to know, in advance, what the outcome will be.
So, whenever I take a loss, I acknowledge that it will feel painful, but I will bear it gracefully. I will not allow it to overwhelm my mental state or cause me to stray from my strategy.
One loss will not break me.
Print that out. Tape it next to your computer monitor. And read it every time you go to make a new trade.
Seriously, if you can admit the fact that losses are simply the “cost of doing business,” you’ll be well on your way to taking your losses as gracefully as Soros and Buffett.
Of course, after admitting that losses are inevitable, you’ll still want to find a way to protect your mind from the psychological damage that losses invoke.
Here’s one “trick” for that…
Reduce Losses by Reducing This One Activity
Soros and Buffett know how to keep focused on the long view. They aren’t concerned with what happens on any one day… or in any one week. They care about monthly performance, and even more about annual performance. They know everything else is just meaningless noise.
After admitting to yourself that losses are inevitable and unavoidable, decide how often you’ll check your brokerage account balance.
Daily? Weekly? Monthly? Yearly?
In the age of instant access, investors are tempted to monitor their account balances almost constantly… with hourly checks and automated alerts to their smartphone.
That’s just insane! Don’t do it!
If you’re committed to being a disciplined investor with an eagle eye on the long view, you really shouldn’t check your account balance more than once a month.
Consider this chart, which shows the success rate of the market-timing model I’m sharing with early-access subscribers to my Project V service:
As you can see, checking your account balance every day makes no sense. No matter what strategy you’re following, you have something like a 50% chance of seeing a loss on the day and a 50% chance of seeing a gain. And since daily performance is just “noise,” there’s no good reason to check your account balance that often. You’ll only give yourself heartburn and increase the temptation to cave in to your emotions and do something stupid.
Checking your account balance once a month makes more sense. Most good, time-tested strategies will produce positive returns most months – anywhere from 60% to 80% of the time.
And, of course, a good strategy should have far more winning years than losing years. Back-testing has shown that my Project V market-timing model has had a historical, annual win-rate of 92%.
No matter what strategy you’re following, if you’re committed to strengthening one of the most important skills in investing – the ability to take a loss gracefully – I suggest you follow two simple steps.
1) Admit that losses are inevitable;
2) Resolve to check your account balance no more often than once a month.
In the end, you’ll be a happier and wealthier investor.
Editor, Project V
Follow me on Twitter @InvestWithAdam
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