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Think Like the Great Investors: Make Better Decisions and Raise Your Investing to a New Level by Colin Nicholson

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Chapter 13logo.png

We cannot change the past (the sunk cost fallacy)

Between 1988 and 1993 the Australian stock market swung upward and downward in a sideways pattern. This has happened again between 2009 and when I am writing this book in early 2013. Markets that swing up and down in a generally sideways pattern are the most difficult markets for active private investors to manage. When markets are rising consistently, investing is easy: active private investors buy good stocks and hold them, switching out of any non-performing stocks as necessary. It should be just as easy when markets are falling consistently: active private investors sell any stocks that are not performing and sit in cash. However, when markets go generally sideways with significant up and down swings, even quite experienced active private investors come under real pressure to follow their investment plan and to act on stop-loss levels faultlessly.

Of course, passive investors have few decisions to make, but they suffer considerable unrealised losses of capital and reduced income through the downward phases in the market cycle. This can be disastrous if they have to sell investments at the wrong time for living expenses.

As we saw in the previous chapter, successful active investors should have learned that one of the keys to high returns is to let profits build and to cut losses quickly. They are ruthless in quickly ...

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