Anatomy of A Stock Market Loss

“Somewhere beyond right and wrong, there is a garden. I will meet you there.” ~ Rumi

If you invest in stocks, at some point, you are going to lose money. Try as much as you can, but there is no way around it.

Sometimes, a stock market loss is immediate and clear. A stock you bought at a higher price has plummeted. Like this one…

In other cases, your losses are not as obvious because they are more subtle. Like for investors in this stock, who suffered a time correction by holding on for five years yet seeing slightly negative returns…

Each of these types of losses can be painful, and especially for the fact that we assign negative connotations to the very word “loss.”

A “loss” in the stock market is essentially considered as a synonym to “failure,” and as being “wrong.”

When someone loses money, he invariably equates it as a failure, to being wrong. Similarly, when someone makes a profit, it is assumed as a success, to being right.

But in the stock market, being right and making a profit are not necessarily the same things. And being wrong and incurring a loss are not same either.

Jim Paul wrote in his book, What I Learned Losing A Million Dollars –

Success can be built upon repeated failures when the failures aren’t taken personally; likewise, failure can be built upon repeated successes when the successes are taken personally…

Personalizing successes sets people up for disastrous failure. They begin to treat the successes totally as a personal reflection of their abilities rather than the result of capitalizing on a good opportunity, being at the right place at the right time, or even being just plain lucky.

They think their mere involvement in an undertaking guarantees success. This phenomenon has been called many things: hubris, overconfidence, arrogance. But the way in which successes become personalized and the processes that precipitate the subsequent failure have never been clearly spelled out.

In other words, we personalize successes and failures in investing because we involve our ‘ego’ in the process.

Dictionary defines ‘ego’ as your idea or opinion of yourself, especially your feeling of your own importance and ability. As per psychoanalysts, ego is that part of a person’s mind that tries to match the hidden desires of the unconscious mind with the demands of the real world.

Now, the thing about our ego is that it NEEDS to be right, so in order to be right, there MUST be a wrong. Therefore, it spends the day making comparisons. It compares possessions, it compares kids, it compares spouses, it compares wealth, it compares stock portfolios, it compares wins and losses, it compares everything.

Spiritual teacher and author Eckhart Tolle wrote in A New Earth: Awakening to Your Life’s Purpose –

There is nothing that strengthens the ego more than being right. Being right is identification with a mental position – a perspective, an opinion, a judgement, a story. For you to be right, of course, you need someone else to be wrong, as so the ego loves to make wrong in order to be right.

However, as Jim, the guy who learned something losing a million dollars, wrote in his book (emphasis mine) –

Participating in markets is not about being right or wrong, nor is it about defeat; it’s about making decisions.

Decision-making is a process of reaching a conclusion after careful consideration; it is a judgment; a choice between alternatives when all the facts are not yet, and cannot yet, be known because they depend on events unfolding in the future.

In 20-20 hindsight, decisions might be good or bad, but not right or wrong. With regard to the markets, only expressed opinions can be right or wrong. Market positions are either profitable or unprofitable, period. But due to the vocabulary quirks, it is easy to equate losing money in the market with being wrong. In doing so, you take what had been a decision about money (external) and make it a matter of reputation and pride (internal). This is how your ego gets involved in the position.

You begin to take the market personally, which takes the loss from being objective to being subjective. It is no longer a loss of money, but a personal loss to you.

To repeat, participating in the stock market is not about being right or wrong. It is not about success or defeat. It is only about making decisions.

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A decision is a vehicle to help you take action (not necessarily, too much action), and taking action is the only way you move forward. It is the only way you invest, or live life.

Taking stock market return – positive or negative – personally leads us to exit profitable positions and keep unprofitable positions. It is as if profits and losses reflect our intelligence or self-worth, and if we take the loss or do not take the profit it will make us feel stupid or wrong.

Worse, it is not just our own profits and losses that we believe reflect our intelligence or self-worth, we also use such yardsticks to measure the worth of others.

Forget lesser mortals, there are enormous examples of people questioning the intelligence and worth of Warren Buffett by holding him to the “losses” he may have incurred or “failures” he may have seen in some of his stocks.

Seth Godin, American author, businessman, and one of the best management thinkers I have read over the years, wrote in his book Tribes: We Need You to Lead Us –

The secret of being wrong isn’t to avoid being wrong! The secret is being willing to be wrong. The secret is realizing that wrong isn’t fatal. The only thing that makes people great is their willingness to be not great along the way. The desire to fail on the way to reaching a bigger goal is the untold secret of success.

This does not mean that you trip repeatedly in your efforts as an investor. Because to achieve success in investing, you still need to ensure that 60-70% of your decisions work out well, and those that don’t, keep you away from ruin.

But beating yourself up over a decision gone wrong is every bit as egocentric as convincing yourself you are amazing because a decision went right.

When we are able to see and accept ourselves separate from our successes and failures, both in investing and life, because we remember that we are human, and therefore imperfect — and that this is really okay — the journey becomes much easier and more promising.

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When we are able to decouple our ego from a bad outcome, both in investing and life, it creates an opportunity for us to learn from it. Similarly, separating ego from success saves us from future disasters.