So, you invested in a stock. You had high hopes.
But alas, the stock disappoints and falls 50% from where you bought it at.
You are now stuck with a difficult decision.
Should you bite the bullet and sell?
Or should you double down and lower your average buy price?
The decision is tough.
…. and if we’re being honest, neither option looks good.
What if you found out about the stock today?
As hard as it sounds, you have to disregard the price you paid for the stock.
Unfortunately, the stock market does not take the price you paid into account .
In effect, you have to behave as though you found out about the company for the first time today.
By doing so, you are disconnecting yourself from the money factor that clouds your decision.
You are looking at the business as if you have never invested in it before.
Only then will you be able to analyse the business as it is today and make a good judgement as to whether the company is worth holding, or a candidate for selling.
I’ll take Option C
The next thing to remember is that you don’t have to make back your money using the same stock.
As we focus on the losing company and spend all our time on it, we may start to feel the burden to act after doing a ton of homework on the stock.
However, you have to remember that you don’t always have to act.
We can always choose to wait a quarter or two for more information to be revealed.
Or, we could look at better and easier stock ideas that may turn out to be more deserving of your cash.
The decision is not always about whether to buy more or to sell.
There is always an option C.
Dealing with uncertainty
Sometimes, we are left with a decision that is not clear cut.
You may have found good reasons to add to your losing stock. At the same time, a case could be made to sell as well.
So, what should you do in such a situation?
The late Nelson Mandela has a good answer for such a situation. He said
“I never lose. I either win or I learn”
In that spirit, we should not fear making the wrong decision.
After all, no investor is correct all the time.
But it would be a shame if we made a wrong decision and did not learn from the error of our past choices.
Luckily, there’s an easy way to do that.
You can get into the habit of learning by noting down your decision and writing out your reasoning behind it.
To go a step further, you can set a reminder on your calendar to review your decision one year later, two years later, or a suitable time frame of your own choosing.
That way, your chances of learning from your mistakes increase.
And if you are able to learn from your past mistakes, you can apply them to the future.
And that, my dear reader, is the secret of becoming a better investor.
It’s nothing fancy.
The simple act of learning from what went right and what went wrong is likely to tilt your learning trajectory upwards, which will bring you closer to becoming a great investor.
And yes, we do want to learn from our successes as well.
That’s because success begets success.
When we start to recognise what works and are able to limit our errors, that’s when investing becomes wildly profitable.
And that’s what we should do … Become a little better every day.
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