I wrote this a decade ago, and if you keep only one resolution this year, this is the one it should be. It will open a cascade of improvements for your finances . . .

 

 

Take Responsibility for Your Stock Losses
Barry Ritholtz
RealMoney.com, April 12, 2005

 

 

“He who blames others has a long way to go on his journey. He who blames himself is halfway there. He who blames no one has arrived.”

– Chinese proverb

 

In the first installment of “The Apprenticed Investor,” we discussed why investors should expect to be wrong, and most importantly, having appropriate plans for what to do when you are wrong.

That column gave you two lessons disguised as one. Hidden within was a second, subtler message. It is so obvious, yet so ignored by investors: You are ultimately the only person responsible for your investments.

Apprenticed Investor: Take Responsibility for Your Stock Losses

That sounds pretty straightforward, but for some reason it seems to be a problem in our society. Few want to take responsibility for their actions or situation, if they can avoid it.

Think I’m exaggerating? Every kid who does poorly in school gets diagnosed with ADHD. We are fat because of McDonald’s (MCD). There are shootings because of TV violence.

In sum, it’s easier to pass the buck than to admit the truth.
Bad Excuses for Poor Investments

At times, the excuse-making from investors is even worse. Over the years, I have heard every complaint imaginable for why losses occur. Inevitably, these gripes go something like this: “It’s not my fault but the fault of”:

The analyst analyst who recommended it.
The banker who did the deal.
CNBC, which hyped it.
The talking head who loved it.
My brother-in-law, who got a hot tip on it.

 

I’ve heard people complain about their broker’s broker bad advice, the lousy execution they got, and how a market maker market-maker or specialist specialist hurt their trade. Other kvetches? Management stinks, insiders insider-trading are dumping shares, regulators are overzealous. Margin calls margin-call did it. Or was it the president’s policies or congressional gridlock or Chinese imports? Really, who can trade when the economic data are cooked, and the “Plunge Protection Team” counters your best positioning?

I’ve overheard people complain that they lost money because Alan Greenspan raised, lowered and/or left rates unchanged. Oh, and Eliot Spitzer, too.

Well, folks, I’ve got some bad news for you. None of those are the reason any of you lost money. The dirty little secret is much simpler. You lost money because you bought a stock, and that stock went down, and then you sold it. Period, end of discussion.

Buying high and selling low is a lousy investment strategy. Worse is buying high and not selling at all as (paper) losses mount. Think of Lucent (now Alcatel-Lucent (ALU)) or Sun Microsystems (JAVA) or Nortel (NT), or the slew of stocks that went to zero. Too many people rode ‘em all the way down, rather than admit a mistake and take responsibility.

You see, with responsibility comes a natural tendency toward planning. If you buy without a plan in place for when things go south — when your original thesis turns out to be wrong — then you are at fault.

Sorry to be the bearer of this bad news, but the sooner you start accepting that simple truth, the better off you will be.

Why? Because all of the excuses above are foreseeable events that only investors (and fools) fail to anticipate. Analysts can be wrong, TV is about ratings, insiders sell, and talking heads talk. Is that a surprise? Hey, guess what? The Fed federal-reserve-system raises and lowers rates, the FDA pulls drugs, and attorneys general prosecute.

Review some of the aforementioned complaints, and you will see how foolish they sound. Now try this one: I lost money because I made a bad investment. I lost a lot of money because I made a bad investment without a contingency plan for when things went wrong.

Here’s the only excuse I would accept from an investor: Aliens from Alpha Centauri landed on earth and gave a huge technological secret to the rival of the company whose stock you own. OK, when that happens, you are excused. Short of that, everything else is your own responsibility.
Priorities and Homework

Excuses are just a sign of how lazy we all are (me too), including boredom and procrastination (guilty). If we are going to be investors, then we must do all the heavy lifting that’s called work. If it were easy and painless, then everyone would be a fabulous and wealthy investor. But it’s not, so you have to outwork and outhustle the next guy.

Recall that Michael Jordan didn’t initially make his high school basketball team. After that, he swore he would never be outworked by anyone ever again. He went on to become the greatest player ever. There’s a lesson in that.

We all know guys who can recall every baseball stat of their favorite team off the top of their heads; win-loss records, slugging percentage, ERA. Ask them about the top five holdings of their mutual funds mutual-fund, and they look at you as if you have two heads.

Some people spend more time investigating the purchase of a refrigerator than they do a stock or mutual fund. You have to wonder why people put more time into planning their next vacation than they do their retirement. A vacation is two weeks long; a retirement can be 20 years. There is something wrong with the math here.
The Freedom of Responsibility

Not to get all Zen on you, but once you accept this, there is a certain exhilaration in the concept. Suddenly, planning for your own retirement takes on a different hue. You become more focused, motivated and excited about learning.

Short cuts (i.e., stock tips) make you laugh. When other traders whine about their bad luck/the Fed/market makers, you can snicker to yourself at how they are fooling themselves.

As the magnitude of the awesome responsibility of taking control — and responsibility — sets in, it tends to sharpen the mind. It is empowering.

I think Spider-Man may have gotten it backwards: With responsibility comes great power.

 

This column was originally published on April 12, 2005.

Category: Apprenticed Investor, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

12 Responses to “Take Responsibility for Your Stock Losses”

  1. jeffk says:

    Thanks Barry, I really needed to read this ! The market did so well this year and I was for the most part left behind and I found myself blaming a lot of other people and factors for my under performance. I need to do my homework and stay focused . I’m going to do a lot better in 2014.

    • angeldude says:

      funny how much in common the racetrack and stock market have in common, psychologically anyway.
      it’s a given that most bets are losers at the track, but the excuses are always: the pig was lame, the jockey’s a pinhead, “they” didn’t want him to win, ad nauseum. you never hear: “I BET ON THE WRONG HORSE!”

  2. sellstop says:

    Barry,

    Excellent advice regarding cutting losses and whom to blame for those losses.

    The only point in the whole article that I take exception to is the part about the aliens from Alpha Centauri. I am fairly sure that if that was to happen it would have been priced in and would have been evident on the tape…..

    I say that only partly in jest. If the market is in a good mood really bad things can happen and things will still be OK.
    gh

  3. Stock Soup says:

    Excellent article.

    My three dumbest losses ever.

    1) I shorted a company called Presstek in the 90′s because all the pros were, and I gave myself a 12% stop loss. But when I was down 20%, I was sure the stock was going to break any day. When I was down 50%, I didn’t want to cover and the stock break the net day, so I held. I lost 120% before I closed the position. Boy was that painful.

    Lesson learned. Stick to investing and keep it simple. Shorting is not investing. Also, don’t fear taking a loss because your position *might* turnaround.

    2) I bought an expensive stock called Color Kinetics because they were the only pure play on LED lighting. A month later I woke up and the stock gapped down 50%. I couldn’t figure out why until a few minutes before the close.. Evidently, someone did some guerrilla marketing in Boston and placed LED lighting under bridges and in tunnels with wires sticking out to look cool to skateboarder kids. The police thought they were bombs, but were assumed to be Color K products. I sold minutes before the closing. The next morning the stock gapped back up to where it was two days before. A month later Phillips bought Color K for 30% premium, or 2.5x the price I sold.

    Lesson 2, I lose LESS money when I do NOT act on news and instead wait. Trading implies sitting in front of you monitor watching every tick, and news item. That’s for the Goldman Sachs of the world. It’s a losing game for retail investors.

    3) I bought GM bonds in 2007 because they were yielding > 12% and I figured the bonds were good, even in a bankruptcy, which I thought would never happen anyways. Haha, thanks Obama for squeezing the bondholders in favor of labor.

    I guess that lesson is obvious. If it’s to big to fail, and it does fail, political resolutions can’t be predicted.

    • Winchupuata says:

      Interesting, thanks for sharing. 2013 was my first year trading/investing in the stock market and even though I was 20% up year end I could have been much much higher if not for several dumb (and costly, ouch) mistakes I made throughout the year. Live and learn and accept your own faults.

  4. MaxMax says:

    I did this yesterday, and set stop losses on everything. I got the idea for this from some guy called Ritholtz.

    • May 6, 2010: A date that will live in infamy.

      MaxMax, I have never been a believer in across the board stops for personal investment accounts. My view is that stops are for winners (trailing on fast movers) and new positions. I was watching the Greek riots and the market closely that fateful day and stepped away for a nature break. When I returned a few minutes later, my portfolio was down over 80% and many of my ETFs were showing $0.01 as the last price. I cannot describe how glad I was that I did not have stop orders in place.

      In today’s fast markets, a stop MARKET order can turn a winner into a big loser fast. A portfolio-full can be devastating if (/when?) another flash crash occurs. Use stops judiciously and consider a stop LIMIT.

      • I never enter stop loss orders into anyone’s system. Back in m trading desk days, I watchged too many markets get moved down to a stop, exercise it, and moved back away. Its like free money to specialists.

        The challenge is having the discipline to honor your own pre-determined stops.

  5. BennyProfane says:

    There’s a front page article (Dealbook column) on the NYT website today about the great performance of stocks this year http://dealbook.nytimes.com/2013/12/31/for-stocks-an-amazingly-good-year/?hpw&rref=business Read the comments. Capitalism sucks, it’s all about the evil Fed, the 1% are screwing us all, the world is teetering on another disaster, we need to tax the evil and greedy rich. Would somebody please admit that they made it to probably age 55 without barely saving a dime, spent too much on their oversized house, lived way above their means for decades, and are now looking at an old age going to the same job until the last breath, if they are lucky? Just once?

    You gotta be in it to win it. Or lose, but, it’s definitely your fault if you didn’t save something. Anything.

  6. czyz99 says:

    Thanks Barry. You have made me realize just how bad an investor I am. Its hard to accept, but it is what it is. It really came home about the Fed tapering. The nattering nitwits said stocks would fall. What you said made sense. I now have things I bought in ’10, with nice gains, some kind of record for me.

  7. carchamp1 says:

    Timeless. This post will be just as relevant a hundred years from now.

    “With responsibility comes great power.”

    Great stuff.

    Barry, Did you catch “Contrarian” on Bloomberg? Recorded it. Watched it four times so far. John Templeton was truly one of the masters. A must see for all investors.

  8. rd says:

    “Some people spend more time investigating the purchase of a refrigerator than they do a stock or mutual fund. You have to wonder why people put more time into planning their next vacation than they do their retirement. A vacation is two weeks long; a retirement can be 20 years. There is something wrong with the math here.”

    I would say that this applies to most people that I know (none are in the financial business). Your link on “Understanding Time” is the reason for this.
    http://www.ritholtz.com/blog/2014/01/understanding-time-a-long-term-perspective/

    People can put their arms around a short-term purchase or a vacation, and believe that they can have control over it, so they focus on that. However, compound returns over 30 years with another potential 30 years of inflation in retirement is mind-numbing to them as it moves a couple of rungs down the time chart. This should be a calculation that they have to do repeatedly in high school.

    The constant yammer of the financial news is another turn-off for them. It is all over the place and then they get to see massive market implosions that catch all of the yammerers by surprise, so there is no credibility of the investment system for the average person. Besides, all people are above average and can beat the pros in short-term trading if they try. When they do hear the right messages, they hear that they should invest in low-cost index funds but can’t find them in their 401k which makes them very condused.

    I sit down with my kids as they start working and walk them through the long-term math. We then go over their options for 401ks and Roth IRAs and they end up with simple, low cost target date funds with decent glide paths if they are available or some other appropriate alternative that is essentially fire-and-forget for them. The dollar-cost averaging in of their payroll deductions and gradual increases in their contribution percentages over time into diversified funds should stand them in good stead during most types of markets, and certainly over the long haul. In this bull market, the dollars are already adding up for the first one that graduated. Since they are not used to doing much interaction with the investments themselves, I am hoping they can go through a downturn doing nothing at all.

    I know talking to some of the millenials at work, that they are very confused about what to do for retirement savings. There is a lot of information targeted to them to help the financial firms, but very little to help them individually. The situation is better than it was 20 years ago, but still has a long way to go. Unfortunately, people like Jack Bogle get drowned out in the maelstrom of noise. As a result, a number of them are virtually trading their 401ks as they think they can beat the markets because they keep being told that they can.