You don’t have to make it back the way you lost it

Investing Mantra

  • Doubling down on a bad idea is a bad idea that is twice as bad.

    • Don't cling to a mistake just because you spent a lot of time making it.

    • Denial is an investing sin. Accept it as soon as it happens.

  • Losers average losers.

    • Before you buy more after a big fall, make sure you stand by your thesis.

    • Average costing a loser asset is a losing strategy.

    • Only the biggest losers buy more of a loser asset.

  • Chasing losses is a sign that you are gambling.

    • Chasing losses is when you keep gambling to win back money you've already lost.

    • Chronic gamblers notoriously chase losses.

    • People chasing losses believe the game must "balance out".

      • But this is a statistical myth: the Law of Large Numbers only guarantees that certain ratios converge — and the contribution of any one ‘anomaly’ converges to 0 at the limit — so no particular event has to balance out at all.

    • People chasing losses will often gravitate towards long-shots which entail even more risk — a dreadful cycle that will not end well.

  • Psychologically, you are likely to cling to bad investments because you cannot bring yourself to crystallize the loss and acknowledge failure.

    • On the other hand, by selling winners, you can pat yourself on the back for being so clever. 

    • This is a costly asymmetry. On balance, you should do the exact opposite.

    • The only way to avoid this mistake is by sheer will.

  • Terrence Odean analyzed 10,000 discount brokerage accounts that stripped out distress sales and focused only on trades where clients bought and sold stocks in the same day.

    • He discovered that the stocks clients sold outperformed those they bought by 3.4 percentage points on average over the subsequent year.

“You don’t have to make it back the way you lost it. In fact, it’s usually a mistake to make it back the way you lost it.”

— Warren Buffett, BRK Shareholder Meeting 1995

“One of the most important things in stocks is that the stock does not know that you own it. You know, you have all these feelings about it — you remember what you paid, you remember who told you about it — all these little things. And it doesn’t give a damn. It just sits there.”

— Warren Buffett, BRK Shareholder Meeting 1995

“I’d like to repeat that business about not having to ‘get it back the way you lost it.’ You know that’s the reason so many people are ruined by gambling. They get behind and then they feel they have to get it back the way they lost it. It’s a deep part of the human nature. And it’s very smart just to lick it — by will — and little phrases like that are very useful.”

— Charlie Munger, BRK Shareholder Meeting 1995

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