BehaviourBeginner· 6 min read

Why you sell your winners and keep your losers

The one thing to remember

A loss is not real when you sell. It was real when the business deteriorated. Selling only tells the truth about it.

The question

Notice the instinct while it is happening, which is the only time noticing helps.

Figure

The same argument as the text, as a chain. Each step is what makes the next one possible.

Figure

The jumpy line ends higher. The calm one quietly walks to zero. Volatility is what you feel; risk is what actually takes your money.

1
The pattern is remarkably consistent
Investors sell holdings that are up far more readily than holdings that are down. Selling a winner feels like being proved right. Selling a loser feels like being proved wrong, and so it is deferred, often indefinitely.
2
The result is a portfolio of your worst ideas
Do this for a decade and you have systematically removed your best businesses and kept your worst. The winners were probably winning for a reason, and the losers were probably losing for one.
The phrase 'it is only a paper loss' is the single most expensive sentence in investing. The money is already gone. The share does not know what you paid.
3
Your entry price is not information
The market has no idea what you paid, and the correct decision is identical whether you are up 40% or down 40%. Would you buy this, today, at this price, knowing what you now know? If not, you are holding out of embarrassment.
4
The fix is written, and it is written in advance
A thesis with three specific things that would prove you wrong. Then the sell decision is made by the document, not by how you feel on a Tuesday afternoon. That is the entire purpose of writing it down.

Try it

Anatomy of a bubbleInteractive

Quiet accumulation

Nobody is talking about it. The smart money is buying.

Every bubble has this shape because it is made of people, and people do not change.

You have got it when

For each holding you are down on, you can say whether the thesis broke or only the price did.

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