Limiting loss: To live better, it may help to divest
The concept of stop-loss offers lessons in how to walk away from any toxic situation, and invest instead in the things that really matter
Why do people hold on to bad investments? Is it hope? Is such hope the kind of “middle-class idea” that keeps people from getting rich? Perhaps it is, and I believe this has to do with the fact that most people haven’t wrapped their heads around the idea of “stop-loss”.
This is an idea that stock-market veterans embrace. Most textbooks on finance dedicate at least a few pages to it too. Simply put it means that, at the time of investment, one ought to work out the math such that, if the price of an asset (such as a stock) begins to fall, one has already decided at what point one will sell, cuts one’s losses and walk away. This applies to profits too; when one has earned the profit one expected, or perhaps a bit more, one doesn’t wait; one exits.
It requires much mental muscle to accept losses or walk away from the chance of greater gain. Because that means going against hope. And hope, even when it goes against the odds, is an almost-primeval emotion. It’s what keeps casinos running and lottery systems alive. It drives stock markets and cryptocurrency; ambition and dating apps. Hope is actually a major player in our hyper-capitalist world.
Adhere to logic, though, and the principles of stop-loss make perfect sense.
Anecdotes around people with the mental muscle to do this surfaced during a routine catch-up last week with Santosh Nair, editor of CNBCTV18.COM and author of Bulls, Bears and Other Beasts. What separates great stock traders from the run-ofthe-mill, Nair says, is that the great ones “understand the idea of stop-loss deeply”.
To cite just one example, consider the legendary Rakesh Jhunjhunwala, who died in August. One of the last conversations Nair had with Jhunjhunwala, he says, was around a tranche of stocks he had invested a few hundred crores in. Jhunjhunwala had been convinced one of the stocks would do well. It didn’t. “It broke my heart and I had to sell the stock to cut losses,” the investor told Nair. Once the stock price had breached the lower barrier that Jhunjhunwala had set for it, he sold without question.
This idea can be extrapolated to one’s personal life. It is the triumph of hope over logic, for instance, that keeps some people in toxic relationships or jobs; in workplaces that exploit them or make them miserable. For that matter, it’s why we cling to bad habits. Most of us know that lingering on social media platforms is pointless; but we don’t set a limit to how much time we will invest in it, and so it eats up hours.
Admittedly, ideas such as the stop-loss principle always make more sense on paper. It’s only when one has skin in the game that one learns how little of a glimmer of hope it takes to outweigh reason.
Which is why some of us opt for caution instead. I recently wrote in this newspaper about the pros and cons of investing in cryptocurrency. I would be willing to invest “some money I don’t mind losing” if it meant understanding the market better, I said then. A friend asked how much exactly, and I named a figure. On doing the math, though, I figured a quarter of what I originally assumed would be my risk appetite.
As far as personal life goes, I am unwilling to invest more than 45 minutes a day in social media. That’s my stop-loss. There are many groups on Whatsapp, Signal and other platforms, but five is my upper limit. That’s my stop-loss too. Do I forfeit some gossip and miss out on friendly banter? Certainly. But the gains include more time with my family, seeing my kids happier. And that’s a profit one can’t track in a graph.