Selling Losers

One of the more painful investing experiences

I recently sold two losing positions. They weren’t just losers, they were BIG losers. They were down in the 70 to 80% range. I’m not going to disclose the names, so don’t ask.

I thought they would make an interesting case study. A study on what not to do. These things are painful to write about but hopefully, we can collectively learn from them. Or re-learn lessons that we shouldn’t have forgotten in the first place (in my case).

You don’t need to feel too bad for me, both of these positions were companies that had incredible runs. I made a fair amount of money on them and sold the bulk of my position. I sometimes consider these “remainder positions” - like tracking positions. In this case, I held to continue to monitor the progress of the companies in case I wanted to re-enter them. Although I sold the majority of the positions I still had around 2% positions in each. So almost 4% of my portfolio suffered from a catastrophic loss. Not enough to take me out of the game but painful nonetheless. I think the psychology here might be different than other losses I have taken; which is likely why I have been thinking about them so much lately. Hopefully, writing will help clarify some lessons. Plus rubbing my nose in it should help me not repeat the same mistake again. So here are some thoughts on errors made and lessons learned:

Why did I still own these in the first place? At the time I was selling the positions I thought I was making a rational choice to hold a portion. I was selling because they advanced significantly and I thought they were overvalued. I kept a piece because there was a chance that these were exceptional companies that would continue to compound strongly. If I’m being honest with myself, I think it was simple FOMO. They had done well, but what if the companies went on to 10X or 100X? I would feel bad that I missed such an epic run.

Thesis creep. Both of these investments involved thesis creep. The strategies and the company’s execution changed. I talked myself into holding them. Why? Here I think the nature of the investment played a big role. I learned the thesis creep lesson long ago. I usually sell when the thesis changes materially from when I entered. But this time I was more stubborn and made more excuses. I think I suffered from a negative double whammy. It is tough to admit when you are wrong - which is what drives thesis creep. But it is doubly tough to admit you were wrong if you previously made money on an investment. Not only are you selling a loser now, but maybe you were just lucky the first time and you should have never invested in the first place! Ouch. That’s tough to admit. It was also a new experience for me. I looked at some of the successful investments I’ve made in the past and determined that they were lucky in hindsight. I.e. based on the processes that I use now I would never have invested in them. But to take a loss AND admit that your previous win was a mistake is doubly tough.

Burning negative calories. Every time you log into your account you see some big red numbers. It sucks to look at. It makes you feel like a loser. At the point I sold, these positions represented a tiny portion of my portfolio but they took up an incredible amount of mindshare. Should I buy more if I really like them? Should I see one more quarter’s numbers before selling? I think it seriously messed with my brain for weeks while I held them. We all know the statistics on investing. You will be wrong a lot. Even the best investors are wrong 40% of the time. You can even be wrong 60% of the time and still do well. Nevertheless, we are emotional creatures, and seeing a big red error all the time affected my judgment. Once I sold them I realized how much mindshare they had taken up. I was noticeably relieved.

You can try again - later. Rationally I know that mistakes are part of the game. But I like to be right. And I can be stubborn. Selling a position allows you to become objective again. I have several positions in my current portfolio that I had previously owned. I bought them again because I think they represent good future prospects at the time of purchase. I have proven to myself that I can sell a position and re-enter later if it looks like a good investment. We sometimes think that immediate liquidity is a bad thing and can cause us to make poor decisions in the short term and sabotage our long-term performance. Liquidity CAN also be a good thing if it allows you to get out and look at the situation more objectively.

Math. Not that I need a reminder but big losses are impossible to reverse. If a position is down 75% it is a mistake. Whatever happens in the future is irrelevant. I let a gain in a position turn into a huge loss. I failed to properly protect my capital in this investment. I let a small loss turn into a big loss. This is a lesson I learned long ago and it is painful to re-learn.

I write about mistakes so that I can learn from my investing journey. There will be pain and failure along the way. I’m hoping sharing some of our errors will help us collectively be better investors.

Thinking about my mistakes is seriously ruining this beautiful sunset