I learnt something profound.

About 3 weeks ago I attended the TIA 20-20 seminar in Chennai. As always, Mr. Shyam Shekar came to speak at the end of the seminar. This was at a time when everybody’s portfolio was down 20 to 30%. He said something like: look, everybody’s portfolio is down. It’s possible that you have very little cash left to invest. In such a case, sell. Yes…sell some of the stocks and take a loss. And invest that money in other opportunities where you see a brighter future. Taking a loss is painful, but doing this will allow us to make our portfolios future proof. And that will help generate benchmark beating returns.

And why was this profound? This was profound because of two reasons:

Reason 1:

Anchoring to the price we paid is called Sunk Cost Fallacy. That price was paid in the past and the past is dead. So it is immaterial to hold on to that price. What matters now is what actions do we take in the present that will take us to a better future.

Therefore: Do not fall for the Sunk Cost Fallacy.

Reason 2:

If you continue to anchor to a past, then you will miss out an opportunity to invest in something better today. And if you don’t invest in that better opportunity, there is going to a cost in the future – it’s called Opportunity Cost.

—

Here is a excerpt from my favorite book: How to get lucky by Max Gunther.

As you enter any new venture – an investment, a job, a love affair – you cannot know how it will work out. No matter how carefully you lay your plans, you cannot know how those plans will be affected by the unforeseeable and uncontrollable events that we call luck. If the luck is good, then you stay with the venture and enjoy it. But what if the luck is bad? What if the bottom drops out of the stock market? Or the seemingly limitless promise of that new job vanishes in a corporate upheaval? Or your love affair sours when a rival suddenly appears? The lucky reaction is to wait a short time and see if the problems can be fixed or will go away, and then, if the answer is no, bail out. Cut losses short. This is what lucky people habitually do. To put it another way, they have the ability to select their own luck. Hit with bad luck, they discard it, freeing themselves to seek better luck in another venture.

Max Gunther. How to Get Lucky

—

If you notice, what Mr. Shyam Shekar was saying is exactly the same thing Max Gunther is saying: to get lucky, cut your bad luck. And cut it quickly.

Ups and downs are part of everyone’s life. Even those of lucky people. We may think how lucky Mr. X always seems to go from one good break to another. What we don’t realize is that Mr. X also faces his share of bad outcomes. But what Mr. X and other lucky people do is cut their losses quickly and move on. They don’t wish away the reality. They don’t get emotionally attached to outcomes. And they don’t tie themselves up in knots when it comes to taking losses. No!

They understand that the longer they dwell on past mistakes, the longer they remain unlucky. And the sooner they cut their losses, the sooner they can get lucky. So, to us, it seems like Mr. X goes from one lucky to break to another; what we did not see until now is that they did not dwell too much in the bad breaks.

It is extremely hard to take losses. I used to think I can do it because I have read “How to get lucky”… I soon learned that it was like learning to swim by reading a book. But, then I mustered some courage and ripped out all the “bad” investments like a band-aid. As I took those losses, I could see the vision of a judgmental uncle say: Do you know you could have bought a car with that money you lost? Do you know, you could’ve fed so many Somalian kids with that money? What if the stock you sell is the next Bajaj Finance? What if this and what if that…

All of these are nothing but my own mind playing tricks on me to prevent me from taking the loss. But selling at a loss just had to be done. But once I did it, I felt much better. And with this money I bought what I think are better opportunities, as of today. Whether those stocks I bought will work out needs to be seen. Either way it will be fodder for a future blog 🙂

—

Good decision makers understand the role of luck and to make luck for you, sometimes you may have to cut losses. In my previous blog, I mentioned a friend who understands the role of luck. He had a successful business in Bengaluru. He replicated this in three other cities. But after a couple of years, he realized that two of the new ventures are bleeding money. So what did he do? He shut them down.

Even today when I met him, his other friends were mentioning how he keeps incubating new businesses and keeps shutting them down when they don’t work out. This is the mindset of lucky people and we need to cultivate that for ourselves.

I met another friend who has a degree in Economics. He invested in an apartment in Gurgaon and due to bad luck, his apartment has depreciated in value when everything else has gone up. And because he is anchored to the past price, he is unwilling to sell it at a loss and move on. Turns out, it’s one thing to learn about Opportunity Costs in a text book and another to put it in practice.

In my own life, I realize the times I quit were the times that led me to better luck. The times I felt committed to stick to my decisions led to poor outcomes. If there is a regret, it is that I did learn this powerful idea much sooner.

But you can do better than me. May you get lucky!