Why People Keep Investing in Losing Positions and How To Avoid It

Why People Keep Investing in Losing Positions and How To Avoid It

When Warren Buffett was a young man, he went to the horseracing track and bet the earnings from his newspaper routes on a horse.

He lost.

Instead of going home, he put more money on a new race, which he also lost.

The same thing happened again and again.

He kept going until he had lost all his money.

Afterwards, he regretted it. He bought himself an ice cream treat with his last coin and thought about what had just happened.

Why did he bet all his money and lose it?

He had had an encounter with the sunk cost fallacy phenomenon.

He didn’t want to accept that he had lost money on a particular bet, and he tried to win it back.

Betting on the same horse is an illogical move. Each new bet must be seen as an independent decision.

Sometimes we have a hard time letting go of something because we have invested time and money in it.

We have a hard time accepting that the money is gone.

Friendships and Pants

You find sunk cost fallacies in every aspect of life.

The sunk cost fallacy is at play in our relationships.

It’s at play when you stay in a dysfunctional friendship you’ve had since childhood.

It’s when your friend seems jealous of your success and doesn’t cheer for your decisions, and you don’t even laugh together anymore. It’s when a little voice tells you: “Well, we’ve known each other for 15 years – 20 years – 30 years.”

You’ve invested time in that relationship, and you don’t want to accept that it’s a loss that should be cut. You keep showing up for birthdays and couples’ dinners and keep spending your valuable time with a person who brings you down.

Sunk cost fallacy is also at play in your wardrobe.

It’s when you stick with things because of the value they once had. Maybe it’s a pair of pants that no longer fits.

It’s when you clearly remember how much they cost and where you bought them, and you keep the pants (or the bag or the appliance) because you don’t want to acknowledge that the money is gone.

The Loss Accumulates

It could also be that you’ve started a business and have invested time, money, and resources in it.

Maybe you bought an expensive international domain several years back. Every week you pay the cost of keeping the business afloat. Add to that all the time you’ve spent on it.

The weeks, months, and years go by, the loss accumulates, and you’re still not making money on it.

Every week you keep throwing more time and more money at it. It’s becoming harder and harder to let it go.

Why not just bring the project to a close and go for something that you can monetize?

Because you’ve invested in it, and you refuse to give up.

Giving up is waving goodbye to all the expenses, hours, and resources.

As long as it’s still alive, you think there is still some hope of getting the money back.

Sunk cost fallacy is also at play when you’ve invested in a stock that has tumbled.

Maybe you think, “NOW it must have reached the bottom,” and then you might invest even more (just like Warren Buffett at the racetracks).

Did you know that people are more likely to sell a winning position in a sound company than a losing position in a lousy company?

They do so even though the losing position is a bad investment in a company that has a negative net income, and the other position is in a profitable company.

It’s illogical, but that’s how people do it.

How to Avoid It

Warren Buffett learned an important lesson from losing money at the racetracks.

As Warren Buffett puts it: “You don’t have to make it back the way you lost it.”

Remember that statement. It’s so true.

He promised himself that he would never react the same way again, and that is one of the lessons that has made him such a phenomenal investor.

Warren Buffett is good at pulling out of the positions he no longer believes in.

One example is when, at the beginning of the pandemic, he sold all Berkshire Hathaway’s stocks in four different airlines.

So now you know what it is.

How do you avoid falling into the sunk cost fallacy trap? Here are three steps to avoid it:

  1. Let the present facts be your baseline. Look at it as if you’ve never encountered the investment, the pants, or the friend before.
  2. Accept that the past is past. If the money is lost or spent, it’s gone. Whatever the friend did 10 years ago is gone. It’s who he is today that counts.
  3. Assess the future. Are you likely to wear that pair of pants in the future?  Is the business likely to make a profit? Is your friend likely to support you? If you think so, keep the friend, the pants, the stock. Hell, get one more. But if the answer is a no, get out of there.

When you stick to things solely because they’ve cost you time or money, you are undermining your own potential and devastating your future.

Because one thing is for sure.

You won’t get financially free and wealthy by sticking to bad decisions from the past.

Approach all decisions as if the past doesn’t exist, and have the courage to make real changes.

Learn how to assess a company’s potential in my free e-book Free Yourself here.

 

 

The Biggest Mistake Many New Value Investors Make

The Biggest Mistake Many New Value Investors Make

You have become a dedicated value investor, and now you want to get started at the actual investing.

You have seen the light.

You understand that it’s about buying shares when they are undervalued on the stock market and selling them when they are overvalued (or keeping them).

Congratulations. That’s actually an important milestone.

Maybe the concept seems obvious to you, but for many it’s not that obvious.

A lot of people never get it.

Most people think – and this is the dominant mindset in the market – that stocks always have the “right” price.

Most people believe the market is efficient. They believe that since all (or almost all) information is out there, all data is priced into the stock by the efficient machine called the market. Based on this, the logical conclusion is that whatever price the market decided to place on a stock is the right price.

There’s just one flaw in that line of thinking.

The market is not a perfect machine.

The market is made up of people making tons of decisions, and people are driven by emotions.

It’s about as efficient as a crowd at the town square. One moment throwing rotten eggs and the next moment throwing flowers.

People are driven by all sorts of emotions, including fear and greed, which are the dominant emotions in the stock market.

Prices sometimes fall below a logical level because people get scared out of their wits, and other times prices soar above any logical level because they get caught up in greed and don’t want to miss out.

Not all people get the idea behind value investing.

Warren Buffett said value investing is like buying a dollar for 50 cents. He also said that some people catch the idea right away, while others don’t.

If someone doesn’t get it, you can explain it for days on end, but they will never understand it (according to Warren Buffett).

In other words, you’re one of the chosen who get it – and that’s not something to take for granted.

Be grateful for that.

The Big Value Trap

So what’s the mistake that lots of newbie value investors make?

I believe they haven’t completely let go of the idea that the market is efficient. They basically believe that it’s effective… but that it occasionally slips.

When they see a stock dip, they immediately assume it’s on sale.

You often hear people say something like “stocks are on sale” when the major indices fall 2%. Then they buy left and right without looking into what they’re buying shares in.

But what if the dollar that Warren Buffett talks about has been pumped up by greed for 12 years and has become $10? Is it on sale for $9? Not at all.

Some people use the term “falling knife.”

A falling knife is when stocks in a company are in steep decline but have much longer to fall before they stabilize.

If you try to catch a falling knife, you’ll cut your hand open. It’s a bloody mess.  You have to wait for the knife to hit the floor.

You can also imagine that you’re jumping onto a roller coaster just as it’s twenty inches from the top and twenty feet from the bottom.

This picture is a little less bloody, but it describes the – uncomfortable – feeling in your gut when you buy something that keeps falling.

You can’t count on the rolling coaster going up again… and then it’s money you’ll never get back.

How to Avoid the Trap

So what can you do to avoid these value traps and falling knives?

It’s a bit like the annoying doctor who tells you there is no way around it: you need to exercise and eat vegetables.

No pill can fix it.

Maybe that’s not so bad.

For many of us, exercising and eating fresh vegetables is an enjoyable part of our lifestyle. The same with investing.

What does this mean in stock language?

It means that there is no quick fix where you can just look at a chart on your screen and expect to know that something is cheap because the stock price has fallen.

The first thing you have to figure out is whether it’s broken or not.

You don’t want to invest in something that’s going into chapter 11.

You have to look at the reality of the company. You have to go through a checklist and ask some critical questions so you are sure you’re buying stocks in a healthy company with a good team of managers and strong products that can compete in the market.

Once you’ve figured that out, you can look at the numbers to see what it’s really worth.

It may sound difficult, but it is not.

There are pretty simple calculations that anyone can learn and that are easy enough to do on the back of a napkin.

If you want to learn more about that, download my free e-book here.

Don’t forget to download my e-book Free Yourself where you’ll learn about check list and simple value calculations. You can download it here.

Crush the Excuses Keeping You From Investing in the Stock Market

Crush the Excuses Keeping You From Investing in the Stock Market

Are you outside the stock market despite wanting to be in it?

Maybe you’re suffering from the very common disease called “bad excuses.”

Read this list of the five most common bad excuses and find out how to cure them.

Excuses grow like weeds in your mind, and you need to pull them out so they don’t strangle your budding courage.

It’s about pulling them up by the root as soon as you spot them.

How do you do that?

Bad excuses are just phrases and stories that we tell ourselves, so the easiest thing is to tell yourself a new story.

Here are five of the most common excuses – and the way to get over them:

1. “I can’t figure it out.”

Repeat after me: “I can do it.”

Another phrase you can say is, “I’ve never tried that before, so I can probably do it.” That’s a Pippi Longstocking quote, by the way.

This excuse is very common among women.  

I hope that by being public about my story, I can give other women courage to invest.

The good news is, you don’t have to be the strongest girl in the world like Pippi or possess any other superpowers or supernatural abilities. You don’t even need a particularly high IQ. And you definitely don’t have to be a man. The stock market doesn’t care about sex, color, race, IQ, or whether you have children or not.

This is really good news, because there is a level playing field.

You need a calm approach and a dose of patience to make it work for you.

Just remember, there are a lot of people who want investing to look complicated because they have an interest in you believing it’s difficult.

The entire financial sector would like to sell you their products.

When you think it is difficult and complicated, it’s easier for them to sell you some expensive products.

2. “I’m too old / it’s too late.”

Instead, tell yourself:  “I have the right age and experience to start investing.”

It’s never too late. Never.

There was a German lady who started investing in stocks at an advanced age (after she turned 60). She became rich by value investing, and she also became famous (in Germany) for her strategy when she was in her 70s. You can try searching for her. Her name is Beate Sander, and she is referred to as “Börsenexpertin” and “Millionärin.”

And by the way, Warren Buffett and his partner Charlie Munger are both over 90, and they’re still very active investors.

3: “I’m too young and too inexperienced.”

Say: “This is the best time for me to start investing. I’ll learn and grow.”

I invest my 5- and 8-year-old boys’ savings. I tell them what they own so that they can learn from it. They’re already learning little by little about value investing.

If you’re reading this blog, you are definitely older than my kids.

I always get so excited when very young people contact me. I think about how much their money can grow. If you’re young, you can really take advantage of the effect of compounding.

Even a little bit of savings can turn into a fortune if you have the time and patience.

The excuse of being too young is probably also related to the perception that you first have to spend all your money on studies, homes, weddings, and future children before you invest.

But this is not an either-or decision. You can invest 100 dollars a month as your life develops and you study, get married, and have children. No, I’m not going to mention any cafe lattes. You can have your coffee. You’ll figure out where you want to save – or grow your income.

4: “I don’t know which platform I should use.”

Repeat after me: “Money loves speed, and I make quick decisions about small things.”

Just pick a platform.

You can open accounts and deposits in as many banks as you want, and it’s not like you’re forced to pick only one and stick with that.

Why not just start with your own bank and get some investing experience there? You can always open another account somewhere else.

In the vast majority of cases, the fees will not mean much because as a value investor you don’t trade that often.

Each platform has introductory videos that can get you started, but to be completely honest, I’ve never watched any of them myself. Most platforms are as intuitive as online banking.

If you are afraid of pressing the wrong button and losing a lot of money in a mysterious black hole on the platform, start with a small amount and give it a try. You’ll be more comfortable with the experience.

5: “It’s too risky.”

Repeat after me: “I seek knowledge and invest with a solid strategy.”

The truth is that you learn and build knowledge, and that makes it less risky.

It’s only risky to invest if you don’t learn along the way how to select companies or funds, or if you don’t do some basic research about what you’re buying stocks in.

Unfortunately, most private investors pick stocks at random.

Many beginners buy shares in a company because they heard it mentioned in a podcast or because someone brought it up at a dinner party. Dude, that’s not research.

But not you, because you read this blog post every week (right?).

You’re already smarter than most private investors out there.

Obviously, you’ll research before investing, and you know what to look for because you’ve read my e-book Free Yourself, which you can download right here.

Three Ways to Find Your Next Investment Idea

Three Ways to Find Your Next Investment Idea

How do you pick the companies you want to buy stocks in? How do you even know which companies to look at? Where do you find your inspiration?

These are some of the questions I get asked most frequently.

Here are three ways to find your investments or to get your initial inspiration:

1. Read the Business News

As part of your daily routine, read the news.

You don’t have to read every newspaper from beginning to end, but it’s crucial that you stay up-to-date by skimming the major international and national news media.

You need to at least read the headlines.

When we invest as value investors, we buy stocks that are cheap. This means we often buy shares in companies that are experiencing some kind of headwind.

You can find signs of that headwind in the news.

Let’s say you read about a company that is filing for bankruptcy.

Don’t go directly for the troubled company, but what about researching other companies in the industry?

Stock price crashes have a tendency to spread like wildfire.

When, for example, an airline company files for bankruptcy, there is a high likelihood that many other airline stocks will become depressed. The investor will be worried for a while that there is a general problem.

Ask yourself: which company in this industry is the best? Look at the numbers. Success leaves clues.

Go for that one.

2. Look Around in Your Own Life

Make it a habit to be alert in your life and jot down brands and logos you come across.

Ask your friends why they prefer one brand of dog food over another.

Ask them why they’re flying with just that company or why they’re buying that headset.

Be curious.

Some of the best investments you’ll ever make are companies that you’ll come across as a consumer.

When you start thinking this way – as if the world is full of investments – you will spot wonderful companies everywhere.

When you notice something you want to research later, do something to remember it. You can take pictures with your phone or jot down a note or even set up a reminder.

Do it right away so you don’t forget.

Then you can google the company later on to find out if it’s investable.

How do you actually do that? How do you find out if a company is private or publicly traded?

You google the company name and “stock” or “shares”.

If no share price appears, it’s probably not a company that is listed on the stock exchange.

3. Look at the Fact List

This isn’t a third grade math book, so obviously there is not fact list at the back.

But there’s something even better.

There are websites collecting information about what the top value investors invest in.

One of them is called gurufocus.com. There, you can look up what Warren Buffett, Charlie Munger, Monish Pabrai, and many of the other value investors are investing in.

Warren Buffett began his career by imitating his teacher Benjamin Graham, so there’s no shame in copying the masters.

Stir the Pot

The best thing you can do is to combine the three methods.

You keep an eye on the media and see that a company goes bankrupt.

Then you research the industry and find other companies. You look them up and find out if some of the best gurus are investing in some of them. If you see that a guru has bought shares in one of them, you zoom in on that company.

Of course, you also use experiences in your own life.

Ask your friends whether they use products from the company you’re looking at.

Why do they? Why don’t they?

Next step is to try out their service or product yourself to see what you think.

To learn more about this method of investing in stocks, read my free e-book right here.

The Billionaire’s Five Mental Habits

The Billionaire’s Five Mental Habits

It is hard for you to get rich if you don’t believe it’s possible.

It’s hard for you to become wealthy if you consciously or unconsciously feel a little guilty about wanting more.

It’s difficult to maintain your wealth if you’re afraid of losing money.

Nevertheless, the truth is that building, attracting, and maintaining wealth begins in your mind.

It may sound strange to some people, but nonetheless, it’s true.

What do you think about money?

Is it forbidden (“money is the root of all evil”)? Or neutral? Or maybe a means of doing potentially good stuff, like donating to orphans?

What do you tell yourself about money?

Here are some habits that can help you build generational wealth.

1. Visualize and Believe that You are Wealthy

Our minds give us what we ask for.

If you feel insecure and involuntarily fear losing it all, your mind will do anything to attract said disaster.

Your mind really wants you to be the master.

It wants you to succeed in anything you imagine.

Whatever you fear becomes a kind of prophecy.

If, on the other hand, you imagine yourself in prosperity, you will get a huge tailwind.

So why not just decide to believe in the best from the start?

You can’t gain speed when you’re stepping on the brakes

Warren Buffett said as a child that he would become a millionaire before he turned 30. He envisioned himself as rich from the very beginning.

Maybe that was precisely why he became the richest man in the world (until he started donating his fortune).

While you’re at it, imagine all the good things you will do with that wealth.

2. Set Ambitious Goals

Strong goals are the driving force that gets you moving at high speed.

It’s important to set big, juicy goals – otherwise you’re like a car without fuel.

When setting goals, don’t be like a grumpy, realistic grandpa.

If you set yourself a goal that’s in line with the progress you’re experiencing today, the energy will be flat from the outset. Why? Because there’s not really anything new in it, is there?

If you 10x the goal, you’re guaranteed to fly up from the chair with the question: “Cool, when do we get started?”

Let’s say you launch a small business and your goal is a turnover of 1 million the first year. It’s realistic and on par with your closest competitors.

If, on the other hand, you say to yourself that your turnover needs to be 10 million, then it starts to feel wild and fun.

Likewise, if your realistic goal is 10 million, up it to 100 million. Wild stuff, right?

Something happens with the energy when the goal is challenging. You become much more driven to succeed.

Your imagination is stimulated to think up new solutions all the time because you can’t get there by doing what you usually do.

3. Make Up Your Mind Wholeheartedly

The main reason most people don’t really change their lives is that they never really commit to it.

They just let the days come and go without committing wholeheartedly to whatever it is. There’s a “but” in there somewhere.

Maybe you’re on the verge of deciding to begin investing in the stock market.

Maybe you’re considering starting your own business.

Maybe it’s something completely different you’re undecided about.

Whatever it is, you know what you need to decide wholeheartedly to do.

Things start to shift when you’re 100% committed to it. The universe aligns in a crazy way to help you.

4. Ask Good Questions

We all face difficult days and unexpected events in life.

How we handle them differs enormously.

The same type of event can cause one person to become depressed and another person to commit to change.

Why do we react so differently?

Much of it has to do with the conversation we have with ourselves.

If you slow down and listen to your thoughts, you’ll hear some phrases repeated over and over again in your mind. Maybe you hear some questions too.

What type of questions do you ask yourself?

Do those questions drive you forward? Are they motivating? Or are they knocking you down?

Do you tend to ask, “Why does this always happen to me?” or “What did I do wrong?”

Or do you ask more motivating types of questions, like: “What can I learn from this?”, “How can I make sure it doesn’t happen again?”, or “how can I be grateful that this happened?”.

5. Focus, Focus, Focus

When Warren Buffett and Bill Gates met for the first time, the host asked what the most important factor contributing to their successes was.

They are both extremely wealthy. One, as you probably know, because of coding and building software, and the other, through investing.

They both gave the same one-word answer: focus.

You may have heard that it takes 10,000 hours to become really good at something.

No doubt Warren Buffett put 10,000 hours into learning about money and stock market investments before approaching the first investor for the original partnership.

No doubt Bill Gates put 10,000 hours into programming in his parents’ basement long before he even established Microsoft.

Are you ready to put 10,000 hours into something in order to have an extraordinary life?

Do you want to put 10,000 hours into learning how to invest? How about 1,000 hours? 100?

10,000 hours is enough to make almost anybody bail, but the good news is that you don’t need to put 10,000 hours into investing in the stock market in order to succeed with it.

The Shortcut

The good news is that there’s a shortcut.

You can learn from others who have focused and spent 10,ooo hours learning it.

If you are willing to spend time learning from someone who has put in 10,000 hours of learning, you can get to a pretty high level much faster.

To jump some plateaus, it’s an excellent idea to learn from someone who knows more about a subject than you do. Learn from the best.

That way, you can save time by learning from others’ mistakes and successes and fast-track your success.

Learn faster by downloading my free e-book. Click here to get it.