behaviour
Cut losers, water winners
The rule
Selling your winners and clinging to your losers is like cutting the flowers and watering the weeds.
Where it flips
The rule can flip into blindly holding every winner and dumping everything red. That ignores that some winners are now too costly, and some losers are now cheap. The fix is to act on the reason, not on the last price move. Sell when the reason is gone, hold when it still stands.
Investors feel a pull to book the gain that is up, and to hold the loss until it 'comes back'. Taking the loss makes it feel real, so they avoid it. Over time this trims the holdings that were working and lets the broken ones sit. The discipline is simple. Let a healthy holding run, and act on a broken one. Do not do the reverse just because it feels easier.
A worked example
A reader sells a growing holding that is up 30% to 'lock it in', and holds a falling one that is down 40%, waiting to get even. A year on, the sold winner has doubled again, and the kept loser has halved once more. Flowers cut, weeds watered. [illustrative]
How to spot it
- ·winners sold mainly because they are up
- ·losers held mainly to get back to even
- ·the word 'breakeven' used as if it meant something
- ·the price direction, not the reason, driving the sell
Peter Lynch · One Up on Wall Street