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.
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:
- It makes you try less often
- 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:
- While cutting a loss seals your failure, it also embeds a life lesson in you.
- It provides the means to move on with your life.
- 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.