Let’s assume you are new to the stock market and you have recently invested in two stocks. The value of one stock has increased by 30% and the value of the other has decreased by 30%.
What would you do now?
Most new investors would ‘hold’ the loss-making stock (loser), because losses are always painful. You would now be hoping that one day you would atleast get back your invested amount.
On the other hand, majority of investors will be waiting to sell their winner which has gained 30%. The psychology here is, less experienced investors would want to keep the 30% profit, fearing that the gains would slip away and the stock will fall. If the gain from the ‘winner’ falls from 30% to 25%, the fear will increase even more, resulting in restlessness to sell the stock and keep the profit.
Now let’s take another example:
Let’s assume you are the owner of two businesses. One is doing very well and another is incurring losses. Which business of yours will you look to sell and which business will you invest more in?
See the difference? You would never invest more in the loss-making business and you’d never even think of selling your profitable business.
But when it comes to stock market investing, we end up doing exactly the opposite. We continuously average down our losers, and we don’t invest more money into a stock that’s going up in value after our investment. This investing approach doesn’t work in most cases.
Invest in the stock market like you would invest in your own business. You’ll be rich in 10 years!