“Sell your losers and ride your winners” – that’s what James Montier was proposing in 2002 and probably now would recommend, too. (This is, by the way, a great place of his highly recommended writings – Link).
This dilemma tortured me for a long time and I wanted to share my thoughts. Losers are not always bad investments. Actually, they are one of the best. Nobody likes them, i.e. there are clear willing sellers and for all kind of reasons, psychological and economic.
As it’s written, it has a very absolute meaning, very undemocratic.
Averaging down is a good thing and I am doing it routinely. As per his most recent annual review, Prem Watsa also likes it and calls it “long term value investing approach”. (Link, btw, his liking of RIM still puzzles me – I admit that I do not understand the odds in this particular case). You just have to practice it deliberately. Know the misjudgment and make conscious decision.
New facts (not emotion, not mood, not liking/disliking) and intrinsic value should guide you and not your brain’s asymmetric treatment of pains of loss and pleasures of gain. Each stock has a price and value. When discrepancy is big enough, you can strike.
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