The Battle Cry of Poor Investment Performance

The Battle Cry of Poor Investment Performance

September 2017

Mark Ritchie II

There are many reasons investors and traders struggle in capital markets but one line we continue to hear over again from so many who don’t understand successful speculation is “I’ll get out once I’m back to even.” This could be stocks, commodities, investments with another manager or in a business, and you hear the same line… I believe this is the battle cry of poor performance as it ensures two things; your losses can only get larger and your gains are capped at zero.

This is in part, a study of philosophy and psychology as to what motivates people to hold to such a bizarre investment worldview.  Did they buy or sell something with the hopes of losing?  If not, why adopt such a view after the fact, because in doing so, they are guaranteeing themselves one thing – no profits.  Often this view is driven by the desire to not feel “wrong” or to not feel like a “loser” in any given investment or idea, but nevertheless it’s completely illogical.

There is an old rhetorical question and answer regarding losing trades that goes like this:

Q:  When do you get out of a losing trade?

A:  The second you realize it’s a losing trade

This of course may sound very cliché and inevitably many may be thinking, well what if I don’t know it’s a loser yet?  How to best make that determination is a subject for another time, but I bring it up now to point out that the idea of getting out when even – literally proves you are in a loser because you have lowered your best-case scenario to making nothing! So why hang on to a loser for in hopes of gaining nothing?  This however, is precisely what people do, especially longer-term investors who often find themselves in positions that are largely underwater.  How are you going to achieve superior risk adjusted performance from such thinking?  Furthermore, how much time is your capital going to be tied up in something that you hope makes nothing?  This is the essence of foolish decision making.  You are far better off taking a loss and moving on to not lose on opportunity costs and the expectations of better gains.

Ask yourself honestly if you are holding any positions in your portfolio with the “I’ll get out when I’m even” mentality. If you are, I would assert that it will be impossible for you to achieve good risk adjusted performance.