Blast From The Past: Accepting Mistakes!

Got plenty of interesting comments on the posting, Is Paper Loss Not A Loss?

I thought i dig up an old posting of mine.

Enjoy!

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Anyone like William O'Neil's book, How To Make Money In Stocks ?

I am sure you will be puzzled how come an 'investor' like me would want to read such a book.

Well, a book is a book is a book. And there are some interesting stuff an investor can pick-up and learn from the book. (die lah... do i sound like a book salesman oredia???.. :P)

Anyway... here is a snippet from Chapter 9.

Bernard Baruch's Secret Market Method of making Millions

If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person if he has the sense to cut his losses quickly on the ventures he has being wrong.

As you can see, even the most successful investors make mistakes. These poor decisions will lead to losses, some of which can become quite awful if you're not disciplined and careful. No matter how smart you are, how high your IQ, or education, how good your information, or how sound your analysis, you're simply just not going to be right all the time....

You positively must understand and accept the rule number one for the highly successful individual investor is.... always cut short and limit every loss.

To do this takes discipline and courage.

The whole secret to winning big in the stock market is not to be right all time but lose the least amount possible when you're wrong. You've got to recognize when you may be wrong and sell without hesitation to cut short every one of your losses.

How can you tell when you may be wrong? That's easy. The price of the stock will drop below the price you paid for it! each point your favourite brainchild falls below your cost increases both the chance you're wrong as well as the price your're gonna pay for being wrong.

Ahhh.... I like the second and third paragph (highlighted in red) ..

Some investors can NOT accept the fact that perhaps they could have made a poor investment decision in the first place.

And when the investment turns bad and the financial datas giving us the clear and distinct signs that we are ABSOLUTELY WRONG in our reasoning...

What is the right thing for one to do?

Dont' we want to stop from being wrong?

Or do we want to continue to be wrong and hope that the market will one day correct us from being wrong? (Isn't this simply playing the loser game?)

So what is the right thing to do?

Acknowledge and recognize our mistake by ze CUT-LOSS.

Accept the fact that perhaps it wasn't investing or the buy & hold thingy that went wrong BUT it was our poor initial judgement that was wrong!

Our stock selection was simply flawed.

And we achieve this by SELLING the stock immediately!!

Do not wait for the market to help us correct our mistake.

When we are wrong, we have to accept this fact.

Acknowledge it and deal with it.

Do not turn the buy & hold into a buy & hope.

On the other hand, this other part...

how can you tell when you may be wrong? That's easy. The price of the stock will drop below the price you paid for it! each point your favourite brainchild falls below your cost increases both the chance you're wrong as well as the price your're gonna pay for being wrong.

Ahhh.... i do reckon that this is the most complex part of investing.

Sometimes the stock market simply does not agree with our investment decision!!

What do we do?

Are we right or is the market right?

This is where winners and losers are made in investing. Those who are precisely sure that their reasoning is correct, should not be afraid that the market does not agree with them. Instead, they should view this as an opportunity. An opportunity to invest more of the good quality stuff at the cheaper price. Same quality item but only cheaper.

But... butt.... buttt......

Where and what and how could such investor go wrong?

Well... determining whether if they are right or if they are wrong!

If right then the investor will surely reap their success!

But... if they are wrong.... such strategy is extremely dangerous for what they have only DOUBLED DOWN on their mistake.

Does this make commonsense? or issit simply silly billy to do such stuff?

Again...... i have to mention again..... this is Ze hardest part of investing.... cos when stock prices go down... sometimes.... investors start thinking with their heart and not their brains.... and when they fail to recognise their fault in their stock selection process, they are only DIGGING a deeper hole for themselves.

Tiok boh?


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ps...
my buddy Liam or some call him LMF... recommended Chapter 8 wor... err... me too!... good stuff lah! ... but... i dun think it is too nice if i reproduce wholesale of what's written in that book.