How to know when to take action and when not to when investing

To read or not to read

Hi,

I’m glad you chose to read.

Of course I am, it means you are interested in what I write. But mostly I’m glad because it tells me you are inclined to take action when it comes to your investments.

And that is all what this letter is about. Not taking action when needed is what ruins most investors and I’ll show you both why and how to avoid ruin.

Want to beat the markets in any condition? Learn Mixed Active Investing here.

There are specific moments in each investment when important decisions need to be made. How we make these decisions is what separates good investors from bad investors.

The standard approach we all have in common is:

Have a way of surfacing opportunities

Keep an eye on potential opportunities

Invest in an opportunity

Sell the investment when the time is due

Some decide to skip step 2 and invest straight away when they see something potentially profitable. I never do that because I need to make sure the asset I want to invest fits my criteria and I need to form a theory of where the price will go. Just because something looks promising doesn’t mean it will be.

Eventually, we get to the point where action is needed.

We need to buy.

This one is usually easy.

Yet for some, it can be tempting to wait for a better time. Insecurity creeps in and the better time never arrives, as there is always a new story for why the time is not right.

That typically happens with high-growth stocks. So many investors missed out on Tesla in the last decade because the price was always overpriced in their view. There are many more examples.

If you are insecure, you should not be investing actively in the first place because it will be impossible to make correct decisions. There are ways to build confidence or put systems in place that aid you. Reply if you need some tips.

The tough one is exiting.

Once we are in a position, we have our money on the line and are in the full realm of uncertainty.

Confidence dwindles in the face of uncertainty. We are all scared of the dark, as adults we just pretend otherwise.

Imagine, your investment is up 40%. Do you sell and take the profits? Or do you stay put and risk losing that 40%?

Imagine, your investment is down 40%. Do you sell and avoid losing more? Or do you stay put and wait for a comeback?

Which of these scenarios are you most likely to follow?

Bad investors tend to sell and take the profits because the uncertainty of losing 40% makes them uneasy.

On the flip side, when they are losing they tend to cling to the loss instead of cutting it. They turn to hope now that things got so bad. They lost their confidence.

Good investors will let their profits run as they say. They either sell off small amounts of the position if it seems like it has been running for a while, or they buy even more if they see there is more room for growth according to their theory since it is now confirmed.

When losing, good investors will ruthlessly sell at some fixed percentage of loss and never allow losses to increase. Alternatively, they will buy even more of a losing position, if they are confident in their theory. The very confident and skilled ones switch to shorting if they see the asset price is likely to fall even further and they have reformulated their theory.

Notice the difference in the amount of action taken between good and bad investors.

Good investors are always on top, assessing and taking action based on their theories as new data appears. They always either add more to investments as their theories are confirmed, or they remove or cut entirely.

There is no “let’s wait and see”.

The bad investor approach eventually leads to ruin because over many investments profits are low and losses are high.

The good investors shift the odds in their favor by cutting losses early, adding to winners, and letting them run while taking risk off along the way as they sell parts.

Keep in mind that all this also applies to long-term active investing, I’m not talking trading here. You need to stick to your strategy, theories, routine, and criteria and reassess your positions regularly as new data surfaces.

Long-term active investing is harder because of information overload. Additionally, impatience and insecurity will drive you to make emotional decisions and chicken out or cling to hope. It is key to learn to take regular rational action.

If in doubt, get out. Otherwise, either invest more, take some profits, or go short. Do something.

The only case it does not apply is if you are a passive index investor. Here you can skip all the decision-making in exchange for lower but consistent returns, fewer mistakes, and hence less learning. And that is okay.

I love active investing, it’s an infinite discovery of my own behavioral flaws and attempts to improve. And I like higher consistent returns.

Have a good one,

Chris

Thank you for reading! :)

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