365QOD- Day1236

Commitment Issues

“When do I walk away?”- a great question that is often asked too late

According to James Altucher:

Lesson#6 Say “no.”

One of the dangers in trading is committing to an investment and then being unable to walk away from it.  It is called commitment bias.  Once committed, we see walking away as a loss of time, money, and energy.  It plays with our mind and we find it difficult to stop.

A great question that starts the process of walking away is, “Knowing what I know now, would I get into this investment at this moment?”  That tells you if there is a potential for change.  But unfortunately most of us lie to ourselves and would probably stick with the investment.

SO what is a better way?

I like the 8% rule.  If an investment drops by 8% from my initial investment I need to sell it and walk away.  No questions or guilt.

This minimizes the loss to 8% and it only requires roughly 8% (actual number is an 8.7%) return to get me back to where I was.  I can look for another investment that could give me that return instead of hoping this falling knife will not cut my foot off. 

The secret is to automatically determine an exit point and to pull that trigger.  Say NO! to that investment and find a better one.  You have to be able to believe that anything that goes down by 8 will be replaced by another investment that can go up by 8%. 

Today’s question is:

“Do you know when to say no?”