STREET DOGS

My findings suggest the odds are that an investor’s great ideas will lose money. As such, before you invest a cent into an investment idea, it is imperative to have a plan of action as to what you will do if you find yourself in a losing position. When losing, the successful investors I worked with planned to become either assassins or hunters.

Assassins sold losing investments that fell by a certain percentage or that declined by any amount and showed no signs of recovery after a certain period of time. Hunters invested a lesser amount at the outset and with a plan of buying more shares if the price fell. Hunters were also unafraid to sell if it became clear that they had made a mistake.

The bad investors didn’t have a plan and consequently turned into rabbits. When losing money, rabbits neither bought more shares nor sold their holdings. Once forming an initial perception, rabbits were achingly slow to change their opinion of a stock.

— Lee Freeman-Shor

The trick is not to be the hottest stock picker, the winningest forecaster, or the developer of the neatest model; such victories are transient. The trick is to survive!

Performing that trick requires a strong stomach for being wrong because we are all going to be wrong more often than we expect. The future is not ours to know. But it helps to know that being wrong is inevitable and normal, not some terrible tragedy, not some awful failing in reasoning, not even bad luck in most instances. Being wrong comes with the franchise of an activity whose outcome depends on an unknown future.

Look around at the long-term survivors at this business and think of the much larger number of colourful characters who were once in the headlines, but who have since disappeared from the scene.

– Peter Bernstein