GARBAGE COLLECTION OR INVESTING?
It would seem that taking losses is the hardest thing for most investors to do, especially retail investors. Most investors are reluctant to take a loss, which is probably the single biggest mistake in terms of investment habits. This unwillingness to take a loss leads in one direction… to junk accumulation.
Just think about it. If we make both good investments and bad, as all investors do, and take profits on our good investments but hold our poor ones, what happens? We end up with a portfolio of losses and poor quality investments! Will this lead to investment success? How can it?
Of course, just because a stock falls below your buy price does not mean it is necessarily a failed investment. You generally need to see that something has changed fundamentally to alter your view, or simply become aware of further information that you were not previously aware of.
BUT, if a stock starts to move against an investor, they should investigate the cause and double check that the reasons for holding remain valid. Sometimes you may not understand why a stock is falling but decide to listen to what the market is trying to say, and exit to minimise a loss in the event that there is information that you are not aware of in the market place. Remember, you do not know everything that the market does. There are times when the market will tell you to reconsider your position.
Whatever the case, ALL investors occasionally make mistakes and the best investors recognise these errors quickly and exit a position as soon as they become aware that things have changed. Some of the best investment decisions ever made involve taking a small loss before it turned into a big one.
The excuse “I can’t sell because I am losing too much money” is the opposite of the right view. We should be looking at all our losing investments regularly with an intention of getting rid of the investments that are not performing and keeping the ones that are doing well. To do the opposite is just junk collection, not investing.