When a poor investment is realised, what’s important is how you recover from the loss and the lessons you learn from it that will help you make better decisions in the future.
Everyone makes a bad investment decision, even top investors like billionaires Warren Buffett, Bill Ackman, and George Soros. It’s an inescapable reality of being involved in the markets.
Speaking to Bruce Whitfield on The Money Show, founder of Herenya Capital Advisors Petri Redelinghuys said that most investment mistakes are born from emotional decisions.
“We’re very attached to money, we work hard for it, and if we lose it, it hurts,” he said.
Redelinghuys added that this sparks a need for the investor to make their money back, which drives fear-based decision-making, which leads to reckless mistakes.
To avoid emotional and reckless decision-making, Redelinghuys shared five tips on how to recover from a bad investment or stock purchase choice:
1. Extract a lesson from the bad investment
If you make an investment that doesn’t work out, analyse what went wrong.
Redelinghuys said that a good start is to re-look at your reasoning for buying the stock in the first place.
Many investors make the mistake of buying a stock simply because it went down by 20% or more, without doing their due diligence on the company to discover the reasons for the drop.
In some cases, the company is in good condition, and the drop results from a cyclical market correction, in which case the stock is a good buy. But in other cases, the reason for the drop is that the company is struggling, has a bad balance sheet, and isn’t operating well.
If the latter is the reason for your losses, learn from it and adjust your decision-making when picking your next investment.
2. Document your process
A good practice that will benefit both short-term and long-term investors is documenting your process and results in a journal.
Redelinghuys view is that the market is always right, and while in some cases the market can get it wrong, 99% of the time it’s going to be you that gets it wrong.
“Document the process you went through to make that investment decision,” he said.
Redelinghuys advised investors should write down their thought processes and ask themselves questions such as:
- Why am I investing in this company?
- What do I like about this company?
- what do I know about this company?
- what are the company’s plans for the future?
He added that when you find yourself in a losing position, go through your journal to understand what you did, what went right, and what you missed.
“Working through that journal will be hugely beneficial for you to make better decisions,” said Redelinghuys.
By documenting your processes again and again over time, investors will start to identify what traits are the most successful for them.
3. Learn not to overthink
Being on the losing side of an investment can scare investors from making another purchase, but getting back into the market is the only way to recover from a stock market loss.
Redelinghuys said while doing your due diligence on a company and learning from your mistakes is important, overthinking your next decision will cause more harm than good.
Investors that worry too much and overthink every aspect of a company are at risk of analysis paralysis.
“Analysis paralysis is a saying, particularly for technical traders, where you look at every angle five different times… and never make a decision,” said Redelinghuys.
You have to get to a point where you stop analysing and make a decision.
4. Establish a point at which you will sell a stock
Don’t be afraid to throw in the towel. As an investor, you need to have a predetermined point at which you decide to sell.
This a good way to limit your losses, Redelinghuys says.
“You have to have a pre-determined point where you say, for example, if this share is down by 30% from when I buy it… then I sell. You can always buy it back later,” he said.
By establishing a point at which you will sell a stock, investors act in their best interest and protect their capital.
5. Know when to walk away and find your next opportunity
There are hundreds of thousands of shares around the world available for you to invest in.
Don’t confine yourself to a few companies or one industry – learn when it is time to move on.
Redelinghuys said that when things aren’t working out, look at your journal and adapt your process to find the next opportunity.
“If I’ve had a losing investment or trade, I tend to take that stock off my watchlist for some time. It’s better to walk away, give it three to six months, and then reconsider it,” he said.
“Every year, there is a once-in-a-lifetime opportunity. Two years ago, it was Sasol, and this year it might be something else,” he added.
If your investments are sluggish and not performing to what you’d hoped, do some research and find your next opportunity elsewhere.