If you’re picking individual stocks, it’s inevitable that you are going to pick some poorly performing investments. Not all your stocks are going to be winners. Things can happen unexpectedly that impact a stock, whether it’s the business’s own doing or broader macroeconomic conditions. This year, for instance, many stocks are struggling due to tariffs, which are out of their control.
Billionaire investor Warren Buffett believes there’s one particularly bad, “cardinal sin” that investors should avoid. Doing this is not only a waste of time but also a waste of money. This is a lesson he learned from the late Charlie Munger.
There’s nothing more discouraging for investors than to lose money on a stock that they thought had plenty of upside and room to grow.
However, what’s potentially worse is hanging on and hoping the money losing investment eventually will turn around and rise in value, at least until you are able to recover the originally invested amount. But doing so — assuming the original investment will turn around in the first place — can be a waste of time if you’re deep in the red, causing you to potentially miss out on other opportunities.
Buffett says that it was his longtime partner, the late Charlie Munger, who taught him about what he calls a “cardinal sin” to avoid in investing. “Delaying the correction of mistakes” and “thumb-sucking” are what retail investors today may refer to as simply “bag holding.”
The primary danger retail investors face in such situations is they don’t necessarily realize they were holding on to the bag for too long, blinded by hopes for a turnaround in the stock price that will at least reach break-even price. And when they do realize, it’s probably too late.
This is why I believe technical analysis has value in investing, as resistance levels can be areas where prudent investors should be looking to unload a stock, especially if it has been struggling for a while.
Munger also pointed out that problems “cannot be wished away,” which is sage advice for investors who may be hanging on to bad stocks in the hopes that they will recover. Selling a stock is effectively a finality, confirming that you’ve lost money on it and that it was a bad buy — but it’s also cutting your losses.
However, by holding on, you’re still “wishing” the problem will go away and that the stock will one day recover.
A good strategy for investors may be to take money out of losing investments and put it into an exchange-traded fund (ETF) that mirrors the S&P 500. That can be a good place to park your money while you consider other opportunities. And, at least in the long run, you can be confident that it will rise in value.
