The Real Reason You Can’t Cut Your Losses

This article is part of the fascinating series, Mindshift.

Why do we struggle to sell a fallen stock? Why is it so difficult to come clean in the middle of a lie?

Surface level analysis of why humans won’t easily cut losses says it’s because we don’t want to admit we were wrong or that we don’t want the loss itself. True…But dig deeper, and you’ll see that the root of this problem is actually a fear of failure. Why? Because cutting your losses is confirmation that you have failed, but you haven’t technically failed until you’ve cut the rope of false hope.

*snip*…you’ve failed!

Don’t Make This Life-Crushing Mistake

Are you leaving old, hopeless ropes hanging around, prolonging the result because you know it won’t be positive? It’s easy to believe that nixing a project or idea means you fail in general, but think about the truth Chronic failure comes from the absence of temporal failure.

Plan D is often better than plan A.

Darren Rowse has created 30+ blogs. More than 90% of which have been relatively unsuccessful. But two of them – Digital Photography School and Problogger – are worth millions of dollars.

His 30 blog failures don’t matter much now, do they?

Failure: To Fear Or Not To Fear

Fearing failure does two things:

  1. It makes you try less often
  2. Those few attempts become too important to you psychologically

Depending on how you define it, I count that I have been rejected (indirectly) by women about three times in my life. There are guys out there who surpass that total in one hour with direct turndowns. Now compare my fourth time in 26  years vs. Jon’s fourth time this hour. Because of how I’ve lived, my fourth time will, sadly, be some kind of life milestone instead of a forgettable Saturday night conversation like Jon’s.

Jon has the correct perspective in regards to the pursuit. He sees that taste and compatibility vary widely from person to person, and that a rejection from one woman still leaves more than three billion possibilities.

So how can people like me shift their mind to accept failure? And how does that help us cut losses when we need to?

Overcoming The Fear Of Failure

Defeating the fear of failure is the first step. It’s part mental, but mostly action in my experience. As much as it baffles me that a woman could turn down a near-perfect man like me, the best way to overcome this fear is to face it, absorb the devastating blow, and realize “no thanks, I’m not interested” isn’t actually devastating.

That’s it. It’s the cliche “face your fears.” But the extended version is “face your fears because they aren’t even scary.”

Investors must be able to cut their losses or else they will suffer more losses.

My Favorite Loss-Cutting Investing Strategy: A famed investor’s strategy was to sell any stock that had dropped 10% from his purchase price, and let the gainers “run.” This capped his maximum loss per trade at 10% and gave him theoretically unlimited gain potential. If it sounds smart, that’s because it is. He did very well!

What do most investors do? They sell when a stock goes up 20% because they want to finalize those gains, but they hold on to another stock that is down 35% to “wait until they’re proven correct.” *forehead slap*

Deny legitimate failure, and you have failed again! Cutting losses is done to avoid the dreaded double and triplefail™.

The aforementioned investor accepted his bad picks before they became very bad picks. Of course he missed out when some stocks dipped 10% and subsequently shot up 50%, but he never lost more than 10% on a trade. That is well worth the price of missing a few turnaround picks.

The great thing about stocks is that one great pick can make you rich – had you invested in Apple back in 2000 at $7 a share, you would have made 80-fold on your investment today. A $12,500 investment would be worth one million dollars today. Nice.

Mindshift: Cut The Losses With Confidence

Once you’ve dealt with fear, you’re left with confidence. Confidence displaces fear like Shaq displaces water in your neighbor’s pool, or something. The mindshift into confidence allows you to accept temporal failure, because you believe success will come with persistent effort.

Here are some losses you may consider cutting:

  • Sell a poor performing stock
  • End a bad relationship (abuse, poor compatibility, no attraction, Cowboys fan)
  • Shut down a blog or business
  • Change your mind
  • Mentally let go (death, breaking up, moving away)
  • Donate your expensive jeans to Goodwill
  • Give up a $250 security deposit (yes, me)
  • Switch careers and lose some relevance of your experience and/or degree

Cutting a loss results in emotional pain. Every time. Instinctively, when we lose something we want, we respond negatively. So be aware and prepare for this. It doesn’t always apply, but it does here: No pain, no gain.

Three reasons to cut your losses:

  1. While cutting a loss seals your failure, it also embeds a life lesson in you.
  2. It provides the means to move on with your life.
  3. Cutting a loss usually creates an opportunity (the money from selling your lousy stock is used to buy a better investment).

Without cutting losses, I would not have learned these life lessons:

  • Life must go on after we lose people, and holding on only holds us back.
  • Never invest in a company you don’t understand or have a clear vision for.
  • It is best to get rid of something of value if it is of negative value to you. (minimalism)
  • If a situation or job opposes your goals or dreams, leave it if at all possible.
  • Get out of a relationship the second you know it’s not going to work out – it’s best for both of you.
  • Don’t create enemies if you don’t have to. The stress isn’t worth it. ($250 security deposit)
  • Donating things feels great on two levels – minimalism and helping others. This compensates for the loss in money.

About the Author

I'm lazy, but you can call me Stephen. When you're as lazy as I am, you need superior strategies to live well. My strategies are so effective that I'm productive every single day. As the world tries to figure out how to always stay motivated, I create strategies that don't require it.

Riley Harrison

Hi Stephen,
I really enjoy reading your blog but that’s a good news/ bad news story for you. Although well written and insightful I don’t know if that type of blogging success is enough for you. Many need external validation ( high traffic counts or monetary reward).
Riley

Robert

“Face your fears because they aren’t even scary.” – you summed it up there bro!

The example of approaching women is a great example. So many guys are scared to approach women even though, in most cases, the worst thing that they can say is “no”. It’s all about cutting losses and moving on instantly. As with anything, if you let the fear dominate you then you’ll never get anywhere – the guy who never approaches a woman will probably never get into a relationship. The more you approach, the more comfortable it gets. Usually our imagination paints a picture that is far worse than the reality.

I’ve heard that investment theory before. It’s a debatable one and depends on the health of the company, the future of the company, the state of it’s cashflow, balance sheet, and profit and loss accounts. Investors like Buffet make money from going against the market and holding stocks for many, many years, but you’ve got to know what you’re doing. For most of us, particularly if you can’t afford to lose too much money, the ‘cut your losses at 10%’ is a great strategy. Depending on your portfolio, losing 50% of a stocks’ value can offset alot of other gains.

Some things are worth the fight but yes, like stocks, when things are going downhill and look irreconcilable it’s often a good idea to cut your losses as early as possible.

You still up for that Skype call – it seems like something that will never happen. lol

Stephen Guise

Thanks Riley,

I’m really glad you like my writing! I’m still deciding what I want blogging to be to me. Right now I’m doing it just for fun. Last year, I was trying to do it to make money. When I got sick and stopped blogging, it really hurt the momentum and community here.

I think most important to me is that some people are reading it and gaining from it. If I were writing only for myself, I wouldn’t be putting it online. 🙂 If one day I can make some money from blogging, it would be great.

Cheers,
Stephen

Stephen Guise

Hey Robert,

“Usually our imagination paints a picture that is far worse than the reality.”

Well said! That’s been my experience.

It’s amazing that many different investment strategies that somewhat contradict each other can be successful at the same time. The game is buy low, sell high and there are a few ways to go about doing it – but one thing always seems to fail, and that’s emotional trading.

Cutting losses is an unsung skill that I believe is extremely important in life. Thanks for your insights.

Yeah, I’ve been working a lot and just recently I’ve been sick. How about Skype later today? I haven’t even installed it on my computer yet, haha.

Georgia

Hey Stephen! So glad you’re back blogging.
There’s definitely a bit of intuition in this – you have to also trust your gut instinct. There are so many examples of people who persevere day in and day out for years before gaining success. Have you read Outliers by Malcolm Gladwell? Giving up too early is worse than cutting your losses, I reckon.
I’ve written a couple of freelance articles and you can always tell where the bum articles are. You’ve got to get a good balance between your instinct and what you know to be true. I think being honest with yourself is the first step.
Another awesome article. You always seem to talk about things here that are fresh and interesting and not covered in other personal development blogs. Don’t cut your losses here – as long as you keep pumping out brilliant articles, success will come! 🙂

Stephen Guise

Hi Georgia!

Thank you. I’ve read about half of Outliers. I guess I gave up too early? Haha. I felt it was getting repetitive and that the takeaway is that it takes a long time – 10k hours – to master something.

I’m on board with the ‘go with your gut’ philosophy. It isn’t very scientific, but it just seems to work out best. Thanks so much for the encouragement! It means a lot. The blog has regressed in a few ways because I took that lengthy break, but I’m going to keep going. I agree it isn’t time to cut my losses.

Nevertheless, your encouragement is much appreciated.

Cheers,
Stephen

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