Long-Term Investing: Why We Fail (& How to Succeed)

Here in Florida, the high schools are already far into spring baseball practice. In my corner of the state, the regular season starts in 2 weeks!

So I spent most of Saturday afternoon waiting for my son to finish out a meaningless preseason event. There wasn't much for parents to do or even watch; it was more of a press thing for local sportswriters who cover the high school sports circuit.

Anyway, with a lot of time to kill, and grey overcast rain clouds skidding by on a regular basis, I retreated to my car and found myself doing something I never do...

I listened to dozens of podcasts about investing.

And with each podcast, I found myself getting madder and madder.

What was their "bad advice" that had me so worked up?

"Never sell a losing stock," they all repeated, except if a company's fundamentals change or you determine somehow that your original reason for buying the stock was flawed from the start.

This kind of advice is all around us. Here's a recent headline from the New York Times, in an article written by a fund manager:

As many of you know, my own advice is just the opposite: always cut your losers, regardless of how much you like a stock or its future promise.

See, there's a massive difference between fund managers and ordinary individual stock investors like you and I.

Fund managers always have more "new money" coming in the front door.

But for regular folks like us - we don't have that luxury.

Think about it.

At Fidelity, Schwab, Vanguard, and the hundreds of other mutual fund firms...every week, like clockwork, millions of dollars in "fresh funds" pour in from retirement savers for their 401(k) and Roth IRAs accounts.

So if a fund manager loses money - because of a bear market, a correction, or just a series of bad investment bets -  he can afford to let small losses turn into big losses while waiting for those stocks to rebound.

He (or she) pays a penalty, in the form of lower fund performance. But meanwhile, the new cash keeps flowing in. He keeps putting more of that money to work. Eventually, the market improves, and the fund manager looks like a hero (or at least, not a complete fool).

But that's not the case for regular investors like us:

The funds I can devote to my investing account are finite. As in fixed, bounded...limited.

No one is going to send me "fresh money" to replenish my account while I wait for my losing stocks to rebound.

And that's why most of us fail - and fail badly - at long-term investing.

In other words...

We are told to imitate the habits of professional fund managers (i.e. keep holding your losses, don't automatically sell).

But with limited cash, and our money tied up in "underwater" stock positions, we're hamstrung to take any further action to help ourselves.

After the 2000 dotcom bust, it took stocks as varied as McDonalds (MCD), Amazon (AMZN) and Microsoft (MSFT) 7 years and longer to regain their old highs.

So as a year goes by, then 2, then 3 years...eventually, we grow tired of staring at our losses. We sell - and swear never to buy another stock again. But there's a way out...

The "Secret Formula"

I constantly write the phrase below, mainly because it is so hard to do in practice all the time:

Cut your losers, and let your winners run.

As a service to new or young investors, I've even introduced a new interactive worksheet feature on the website - which I'm making available to all subscribers for the time being...

I call it "the Secret Formula" (click here for free access with no come-ons whatsoever).

In truth, there's nothing secret about it. But the interactive worksheet helps reinforce the idea that what counts in investing and trading is not the money we make. It's the money we don't lose.

There's a difference. If we keep our losses small on each stock investment idea, we buy ourselves valuable time, free up valuable cash, and avoid destroying our own self-confidence.

Once we do that, we have the ability to stay in the game long enough to buy a stock at the lows, and ride it to truly long-term gains of wealth.

Good luck to us all in the week ahead.

Jeff