In his book, The Dhando Investor, Mohnish Pabrai discusses the 3-year rule for cutting losses. Here’s an excerpt from the book:
When the stock was at $5 in 2003, all Pabrai Funds hoped to accomplish after two to three years was simply break-even or hopefully exit with a small loss. The “holding losers for at least two to three years” rule prohibited a sale at that point of maximum pessimism for USAP. The chakravyuh traversal rules helped transform USAP from an ill-timed, ill-fated losing investment into one that has delivered a very acceptable return on invested capital.
After three years, if the investment is still underwater, the cause is virtually always a misjudgment on the intrinsic value of the business or its critical value drivers. It could also be because intrinsic value has indeed declined over the years. Don’t hesitate to take a realized loss once three years have passed.
Such losses are your best teachers to becoming a better investor. While it is always best to learn vicariously from the mistakes of others, the lessons that really stick are ones we’ve stumbled though ourselves.
Over time, learning from your stumbles, you’ll begin to notice a diminishing number of unsuccessful chakravyuh attempts.
You can find a copy of the book here:
Mohnish Pabrai – The Dhando Investor
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