Investing is about making a profit. We invest money in something hoping to make money out of it. While we do make money out of many decisions, some decisions could go horribly wrong. For a variety of reasons, we could end up with an outcome that is hardly what we hoped for.
When was the last time you made a loss in the stock market? And, how did you deal with it? Investors hate losses. Losses damage our self-esteem besides leaving us poorer. While the loss of money is accepted easily, the difficult part is to deal with our loss of self-esteem and self-worth. Investors either recover from a loss or become reclusive after making one.
Why should we deal with loss? How should we deal with loss? Should we forget our mistakes or remember them? How do we recover from them?
Losses are inescapable. There is hardly anyone who never made a loss. Accepting that a loss can happen to anyone is the prerequisite for us to avoid future losses. We need to understand why we made a loss and how we can avoid making the same mistakes in the future. To understand the above, we must learn to deal with loss.
Let us understand how investors try to recover from losses. We mostly try hard to forget about a loss as soon as we can. We try and put it behind us. But, when we do so, we actually forget the mistakes done earlier and tend to repeat them. Forgetting a mistake is by itself not easy. But, the question to be asked of ourselves is significant. Should we really forget our mistakes? What happens when we forget our mistakes?
Let us study a situation that could have happened to any of us. A common way in which people make a loss in the stock markets is by taking positions in the futures segment without adequate margin money to put up if the stocks dip. Therefore, when the stock prices fall, the brokers ask for more margin and inevitably close our position if we cant put the money on the table. Investors mostly do not altogether stop trading in the futures segment after making a big loss. Instead, they spend some time away from trading when they recoup enough money before they set forth again to trade in the futures segment. Inevitably, they repeat the same mistake again. Trading without adequate liquidity to meet future margin needs is a typical mistake which investor repetitively commit. So forgetting about a loss is not good for investors as it merely helps to superficially overcome the hurt.
Forgetting a mistake will inevitably lead to its recurrence. Remembering them is a sure way of keeping ourselves aware of how we went wrong. By remembering our follies, we can relate our present circumstances and decisions to our past follies. Our minds will alert us whenever we are moving towards the same symptoms or transaction methods that landed us in losses. We can proactively avoid the mistakes by steering clear of decisions that look very similar to our loss-making ones.
How do we deal with losses which are temporary or notional? When do we face such situations?
Dealing with notional losses is very important as notional losses could turn into profits within reasonable periods of time. We often face such situations when we bought a stock when the markets were trading near the highs and subsequently both the markets and the specific scrip fell as part of an overall trend. The fundamentals of the company could still be very favorable for strong future performance and the price drop could well be temporary. If we do not show enough conviction during such testing times, we may end up turning our notional, temporary losses into real, permanent losses.
When we do make a notional loss in an investment, we need to evaluate the circumstances closely and decide if the company’s share price will recoup in the near/ long term. This will help us understand if the drop in price was actually temporary in nature. If we are convinced about the future potential, we can even use the opportunity to buy more. Alternately if we do not do enough homework, we may end up selling the stock. We will eventually end up buying and selling a good scrip at the wrong time. This is another common folly of investors which makes them hate the markets and shun them.