Cutting losses

When things go wrong, don’t go with them. Anon

Those who are active investors in the stock markets would be familiar with the adage’ Cut losses’. This simply means that when the tide turns against you and your investments start showing losses, it is best to sell and suffer a minor loss rather than sit tight in the hope of  a change in fortunes and loose very heavily. While the logic of the argument is very well understood, human nature being what it is finds it hard to accept the loss and so we wait in hope only to realize too late that discretion should have been the better part of valour.

While the stock markets abound in such die hard fool hardiness, real life is not too different. Part of the problem about cutting losses stems from the conflict between what the heart feels and what the mind thinks. We are simplistic enough often to logically conclude that what goes down must come up again or vice versa. The theory is perfectly true when seen in isolation but when seen as part of a continuum called life, we have ample opportunities to ride a wave but not the acumen to consistently remain on top of the wave. The lesson to us is that when we are on the way up. It is prudent to get out lest we get caught in the vortex and get sucked in. Unfortunately our greed and ego blinds us to the realistic peaks and lures us to believe that the best is yet to come. Sadly we then become prey to these vices and cannot get out of the vortex of false hope.

Equally naïve is our belief that we are smart enough to analyze trends, have sophisticated modeling mechanism to predict the future and the wherewithal to sustain the pressures that come with the  territory. History is resplendent with examples of the colossal failures of the once successful kings and rulers who blinded by success could not in their wildest dreams  or nightmares imagine failure of any sort. The end of the monarchy system is proof of how the power of the people and the advent of democracy has consigned to history  what was once perceived as an impregnable fiefdom of the kings and their courts. Coming to the present day, the big businesses that ruled and monopolized the economy in the early 20th century have all but disappeared and replaced by more technology driven newbie’s.

No sooner do we spot a problem then our mind goes into an overdrive to rationalize, justify and generally uphold our beliefs so that we don’t face the discomfort of having to acknowledge that the problem is real. If the problem persists we try to trivialize it, explore possibilities to circumvent it and in desperation even make feeble attempts to minimize the impact of the problem. Only the wise and the enlightened, the one who uses both the mind and the heart can foresee the folly of riding a loser and will quickly cut losses, dump the loser and either jump on to safe shore or latch on to a possible winner. As they say it is better to lose the battle and win the war than the other way round.

Remember: “I believe there’s an inner power that makes winners or losers. And the winners are the ones who really listen to the truth of their hearts.” Sylvester Stallone

Try these:

  1. In your chosen field of expertise, try to predict the changes that will come about in the next one/ tree/ five years. Ask yourself what your strategy will be to ensure that you can leverage the changes to your advantage. This could imply that you have to consciously give up a current line of action in the hope that you can leverage the changes coming about by your current if you see that banking will be more electronic and less physical are you ready to embrace e-payments as of today or will the fear of phishing and cybercrimes hold your resolve and you maintain status quo?
  2. If you are a sports enthusiast or an investor in the stock markets make a realistic analysis of your favorites (team / stocks). Which team do you expect to win the current season and will you bet on that team even if it is not your favorite? Substitute stock for team if you are a stock enthusiast. Why do you hesitate to change loyalties when it comes to betting?

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