We’ve just been re-reading Michael Burry’s MSN Case Studies in which Burry provides some great insights into what investors should do after suffering a loss saying:
How to get even
An outsider might find investors’ thinking odd. Presented with new money to invest, most set goals of growing that money. They set targets of 20%, 30% or sometimes much more. And they set off fully intending to do so. Not so odd, yet.
However, once having lost money, investors tend to set a seemingly conservative new goal: breakeven. The irony is that breakeven math is one of life’s crueler realities. That is, breakeven requires a percentage gain in excess of the percentage loss incurred. Not so conservative.
Moreover, losses are the ultimate slippery slope. If one has lost 20%, then one requires a 25% gain to break even. If one has lost 50%, one requires a 100% gain to break even.
As a result, the goal of breakeven is often much more aggressive than one’s initial investment assumption. In an attempt to get back to breakeven, most investors simply ratchet up the risks they take. Of course this usually just ratchets up the losses – and increases the required return back to even. Talk about a death spiral.
My experience is that when one has losses that look other than temporary, there is usually a reason. The appropriate corrective action is to investigate the reason for the loss. More often than not, I find that I have strayed from the consistent method of investment that has served me so well for so long. Indeed, this finding often needs no investigation – I knew at the onset of the investment operation that I was straying, yet foolishly plowed ahead anyway.
All investors stumble. Usually some stubborn insistence plays a role. But fools will not be suffered lightly in a bear market. The risk of ruin is real. As investors, we must continually guard against the missteps that might lead to losses – and react rationally if we find ourselves down.
Acting like a fool after the fact will only compound the error.
You can find Michael Burry’s MSN Case Studies here – Michael Burry’s MSN Case Studies.
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