You cannot hope to make decent money from investing unless you can learn to deal with losses. Dealing with losses is firstly and foremost about an emotional response which needs to be appropriate.
Any investor, however successful, will invariably have both profits and losses in their results over any given period of time. If you were going to invest to make money (profits), the judgement has to be across all of your investments over a stated period. It is virtually impossible to think of any scenario where this is ultimately successful that, during the passage of time, doesn’t involve losses as part of the results, in other words, some of your investments, some of the time, will make a loss.
One of the key mistakes that investors tend to make is that they react to losses in the wrong way, in particular, investors will sustain a loss making position for far too long.
Reversing this in the other direction, one of the most common traits amongst professional investors is that they are exceptionally good at taking losses.
An old investment saying is that your first loss is your best loss. It is sometimes difficult to know what this means but in general terms I believe it means that once you have established a position which involves a loss and selling at a certain level, then you should always have the discipline to pursue that. For example, if you enter into an investment into a share and you set a loss level on that share investment of 15% and the investment goes down 15% then that should be the point at which you sell and get out.
The parameters you set need to be fairly generous and wide ranging because higher risk investments which produce the higher returns are far more likely to fluctuate and it is likely that you will go through loss making periods even with investments that eventually turn out to be very profitable.
As we shall suggest elsewhere in this site, the key is to set the parameters in advance before any investment is made and then to stick with them rigidly. The “no exception” rule will come into play most of the time so in terms of dealing they should be expected in any investment situation from time to time.
Losses are part of the process and emotionally investors should not take a loss as some sign of failure or weakness. Maybe losses should be viewed as just a profit but with brackets around it! The most important point about a loss is to accept that if an investment or investments are in a loss making position then that is history and very little can be done about the past. The future is all that matters and if losses have occurred when they were not expected then it probably means that something has occurred which was not anticipated and losses should be taken in order to protect the downside of any investment.
The parameter by which any investment is taken out should always be determined in advance, both in terms of the expected returns, the length of time, the benchmarks against which it will be judged and the losses which will be sustained before the investment is closed. Losses are part and parcel of investing and investors should be able to deal with losses in exactly the same way as they deal with profits in a cold calculating fashion based on a strategic plan.
