Page 471 - THE MARKET WHISPERER

THE MARKET WHISPERER 46 7

Occasionally self-justification turns out to be a self-fulfilling prophecy.
Generally, though, it doesn’t.

A few weeks ago, a golfer friend told me about his 92-year-old father-
in-law who recently lost $150,000 in the stock market. That was half his
capital. He lost it on a failed investment in several stocks showing price
drops over the past few months of trading. Concerned for his father-
in-law’s psychological state, my friend invited him to dinner, and was
surprised to discover he was in an excellent mood. Asking how that was

possible, the old man said, “I’m not worried. In the long term, the prices

will go back up…”

Here’s a possible scenario: you bought a stock and discover you’ve made

a mistake. The price drops and comes very close to your planned exit (stop

loss). When you bought the stock, the exit point seemed very far off and

perhaps unreasonable, but now it is threatening you with a searing loss.

The stock continues to new lows, and you think: “I didn’t make a mistake,

I chose a good stock. It will change direction for sure. I’ll just give it a bit

more time…” The greater the loss is shaping up to be, the stronger your
powers of self-persuasion become. You’re certain that this is not the time
to sell, and move the stop down a bit, then a bit more… and the stock keeps

dropping till you’re losing so much that if you exit, the loss will be almost

lethal. Realizing the loss at this point translates into strong pain. Keeping

the stock translates into hope. And hope suppresses pain.

SMART Loss causes us to drop our guard and switch to crazy buys
MONEY and sells, hoping to recover the loss, which will generally
lead to even greater losses.

Continuing to hold a losing stock is much like holding a lottery ticket
before the winners are announced. In both cases, the chances of succeeding
are very poor. The principle of “as long as I haven’t sold, I haven’t lost” is
simply wrong. That’s a fact. Nor has the chamber of horrors ended: the
stock has reached an all-time low, and institutional traders won’t touch
it. But you have reached the amazing conclusion that since it is already so
cheap, instead of reducing the quantity you are holding and closing out
on the losing trade, you double the quantity of shares in the hope that the
price will recover even half of its drop, returning your account to a state of
balance.

Sound unbelievable? You cannot believe how many such cases I have
come across. If you’re smiling now, that means you’ve already been there,