When I say I learned this rule, I don't mean I always follow it, it just works every time I do. Its pretty simple and I read it in a book on investing many years ago.
I don't remember the name of the book and who wrote it, but I'm sure he was a successful wall street person. The book was mostly technical about how the stock market worked and explained calls, puts, margin calls, and every type of exotic trade that existed at the time.
In the very beginning of the book he shared what he considered his secrets to success, and they included most of the things I have heard many times since about diversifying, managing risk etc.
The one that stuck in my mind and which always has worked for me is based on ignoring your emotions in the stock market.
We tend to fall in love with our decisions and stick with them long after we should.
The simple advice was to acknowledge that you were wrong and get out of the trade if it doesn't do what you predicted.
This is basically a cut your losses strategy and its so very easy to follow, except it isn't, because you do obstinately fall in love with your decisions.
Another saying on wall street is that the stock market can be wrong longer than you can stay liquid.
If all your analysis indicates that some stock should go up and you invest in it, but it goes down, we tend to rationalize to ourselves that tomorrow will be when the market corrects.
Maybe, but just admitting you might have been wrong is the best strategy.
You can always buy it again when the market comes to its senses.
If it ever does.
Now this is a bit more for speculators than long term investors, but why follow an investment down thinking it might go up some time in the future?
Admit it, you are wrong, maybe as often as you are right.
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