We have all experienced it and even the greatest investors of all-time have also experienced it. The realization that the stock we spent an inordinate amount of time analyzing is not going to increase in value the way we thought it would and that we are going to have to bite it and sell it at a loss.
Let's be honest about this. It sucks to lose money at anything, let alone your hard earned savings that you've allocated to stocks and if you've lost a lot of money on a stock or many stocks, you feel like you want to go somewhere and cuddle up in the fetal position.
As human beasts, our emotional makeup when we resign ourselves to selling a stock for a loss is pretty unstable. I came across this wonderful piece from Monevator that discusses the guilt that comes with losing money. Building on this, investors experience many emotions in addition to guilt, specifically:
We've spent a lot of time pouring over the financials, crunching ratios, reading research reports, scouring the Internet via social media, blogs, and community discussion forums that we feel we've wasted so much time. Our analysis was laser tight. It was a no brainer, can't lose investment. We feel we are the smartest people in the world because we know something others don't and are on the verge of hitting the jackpot. Then things go downhill for the company. We feel anger at the company, which we think has screwed things up and ruined our chances of earning a huge return on investment.
We feel that our analysis is foolproof and any downturn in the stock price is not our fault. We start looking outward for blame. Our analysis is right. The numbers don't lie. It is rather the fault of some external stimuli like an analyst, the Government, or something written in the media that has created a negative sentiment on the company. We start projecting our frustration and anger on other players.
We're wondering, how did we get suckered into buying this stock? We look at it from hindsight and say how stupid were we to buy this company? What was I thinking?
Often the above feelings will finally manifest itself into guilt. You internalize it, keep it to yourself. The last thing you want to tell your spouse, family, friends and colleagues is how you made a bad investment decision.
These feelings consume us as investors and if we keep these emotions in our minds then it could impair our ability to make any kind of decision in the future. We may become more gun-shy about making decisions. We may second-guess our judgment. When we finally make an investment decision, we are hoping that we won't experience these emotions. How can we rise above these emotions? Can we fight these emotions? How can you control your emotions when an investment decision goes wrong? It's possible, however we need to arm ourselves with some important principles.
Don't take it personally
The best analogy I can think of to explain this trait is sports related, specifically the example of a corner back in football that just got beat by the wide receiver for a touchdown. After getting beat, it's easy for the corner back to experience frustration, anger, and guilt for letting the team down, but they are coached to immediately forget the play and move on. It's in the past. They are coached to have short memories, because if they don't then the emotions of getting burned will enter their consciousness and will limit their future performance. It's the same for hockey goalies. After giving up a goal, they are trained to dig out the puck from the net, shoot it out and then get back into the game. There's little time to ponder what happened.
Investing is no different. When you sell a stock for a loss, you have to just press the sell button and move on and forget about it. The stock market doesn't care about your loss, it keeps moving on. You should do the same. Get over it.
Reality Check: Losses are just as likely as gains
Said another way, #$#%# happens. For every 5 stocks you buy, 1 will be amazing, 1-2 will tread water and at least 1-2 will do terribly. You have to go into investing with an expectation that you will lose money on some of your investments. Not every decision you make will work out. You have to be really comfortable with the concept that you will lose some amount of money. The key is controlling the loss by setting up some expectations and boundaries and holding true to them.
Learn something from it
Before you press the erase button to delete any memory of the investment disaster you've made, take a few minutes to do a post mortem and identify some takeaways from the experience. Review your thought process when you were making the decision. Is there anything you learned? Is there any nugget of information that you can tuck away and refer to in the future if you were facing a similar investment decision? I've written about Game Changer moments that could negatively impact a company and put their stock in the penalty box for a long time. Did your investment face a fateful Game Changer moment.
The learning goes both ways if there was an investment that paid off handsomely, also take a brief moment or two to reflect on what factors in your analysis played in important role in your decision.
In either case it is also important to review and check your emotions when you made these decisions. Was the final decision to buy or sell the stock driven by business fundamentals and your overall strategy or was it gut-driven, emotional throwing of the dart.
The great thing I love about being an investment coach is that often, I spend most of my time with clients checking and developing their emotional tool-kit to help them come to grips with these emotions which can seriously impair their ability to make better investment decisions. If you can frame yourself, understand and confront these elements, the number crunching and analysis stuff will come much easier because you will be in a better position to exploit other players in the stock market who may not be as emotionally disciplined.