In his book – Common Stocks and Uncommon Profits and Other Writings, Phil Fisher discusses the psychological challenge of handling investment mistakes, emphasizing the role of ego. Investors often struggle to admit mistakes, preferring to hold onto losing stocks until they “break even” rather than accepting a small loss.
This emotional reaction can be costly, as it prevents reinvestment into better opportunities. Fisher argues that occasional losses are insignificant compared to long-term gains but warns that frequent failures indicate poor decision-making.
While investors should not react emotionally to losses, they must learn from them. Understanding past misjudgments helps prevent future mistakes, ensuring wiser investment choices and long-term financial success.
Here’s an excerpt from the book:
However, there is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us.
None of us likes to admit to himself that he has been wrong. If we have made a mistake in buying a stock but can sell the stock at a small profit, we have somehow lost any sense of having been foolish.
On the other hand, if we sell at a small loss we are quite unhappy about the whole matter. This reaction, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.
More money has probably been lost by investors holding a stock they really did not want until they could “at least come out even” than from any other single reason.
If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous.
Furthermore, this dislike of taking a loss, even a small loss, is just as illogical as it is natural. If the real object of common stock investment is the making of a gain of a great many hundreds per cent over a period of years, the difference between, say, a 20 per cent loss or a 5 per cent profit becomes a comparatively insignificant matter.
What matters is not whether a loss occasionally occurs. What does matter is whether worthwhile profits so often fail to materialize that the skill of the investor or his advisor in handling investments must be questioned.
While losses should never cause strong self-disgust or emotional upset, neither should they be passed over lightly.
They should always be reviewed with care so that a lesson is learned from each of them. If the particular elements which caused a misjudgment on a common stock purchase are thoroughly understood, it is unlikely that another poor purchase will be made through misjudging the same investment factors.
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