How much can you lose?
Winning by not losing
Hi friend,
The past week I have been at a family retreat on the Danish west coast in a landscape of stunning grass-covered sand dunes in front of wide sandy beaches.
Among the chit-chats and catch-ups, an n-degree cousin of mine got me into talking about investing strategies and what to do and not to do.
She had started investing actively during the pandemic like many others and wanted to share how she was doing.
I was surprised to hear what she did to minimize losses.
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As you know one of my key investing principles is to avoid losing. It is also what my investing course for beginners is built around. The reason is that when we start to invest it is super hard not to dream about the gains.
My cousin would invest and from the start have a clear idea of how much she would be willing to lose in case her investment theory would turn out wrong.
This is what you should always do when you invest in any type of asset.
When you hear the saying don’t invest money you cannot afford to lose the next best thought should be how much of that money you are willing to lose.
There are two difficulties in minimizing losses:
1. Your emotions
2. Recouping the losses
Even if we tell ourselves what is the most we are willing to lose and set a fixed number, it is a different matter to execute the thought when the situation becomes real.
There are many mental biases that work hard as resistance to sell and have us hope that things will turn so we stay invested a bit longer, just to see if things won’t change.
When this happens we are falling to gambling and not investing.
I find that the best motivator and reminder to simply cut the losses is the second difficulty.
A 10% loss requires an 11.11% gain to recoup.
A 20% loss requires a 25% gain to recoup.
A 30% loss requires a 42.86% gain to recoup.
A 40% loss requires a 66.67% gain to recoup.
A 50% loss requires a 100% gain to recoup.
Note how the more you lose the harder it becomes to recoup.
It is much smarter to cut the loss and find somewhere better to invest when the investment theory is proven wrong by the loss.
Add to this that you never really know when you might need some extra money. Sitting on unmaterialized losses for longer periods is risky because you never know if life events force you to materialize them. It is better to work on your investing strategy to avoid these scenarios.
I told my cousin that I always use stop losses that I set at the start of investments so that I know I’m safe without having to deal with my emotions at all should things turn against me.
If I don’t have stop loss orders I use alerts and then execute before analyzing so I won’t have second thoughts and start hoping.
How are you minimizing your potential losses?
Have fun and make profits,
Chris
Thank you for reading! :)
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DISCLAIMER: None of this is financial advice. This letter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.
