What to Do About the Losers in Your Portfolio - Profit Hunter by Equitymaster
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What to Do About the Losers in Your Portfolio

May 22, 2018

Taha Merchant, Research Analyst
  • Most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you're probably being slow.

    Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you're good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.

Though I'm not the biggest fan of Amazon the stock, I am very influenced by these words of Jeff Bezos, Amazon's founder.

I like it so much, it is right up there on my notice board.


In fact, I've made an investing version of this quote that I think is even more useful:

  • Most stock-picking decisions should probably be made assuming you'll get right only around 70% of the ones you wish you had. If you're looking to be right 90% or more, in most cases, you're probably being unrealistic.

    Plus, either way, you need to be good at quickly recognizing and correcting bad investing decisions. If you're good at course correcting, being wrong may be less costly than you think, whereas being unrealistic is going to be expensive for sure.
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If there's one thing stock market investors hate, it's losing money on a stock.

Each time an investor buys a stock, he goes in with the expectation that the stock will deliver great returns. And that these returns will help them create wealth.

So naturally, when a stock doesn't deliver, disappointment is quick to set in. And doubt.

But you see, it just doesn't work that way!

I've learned this from Benjamin Graham. And in over a decade of experience, I've seen it play out over and over again...

Profitable investing is not about picking winning stocks. It's about expecting the losers, and factoring them into your stock-picking strategy.

The smart ones take precisely such an approach to equity investing.

And despite that, promptly enough, will come in the losers.

After the fact, doubt and questions will always abound.

'Wasn't it obvious that this was not a good stock?'

'How could I buy XYZ Ltd? Didn't I do my research properly?'

But here's the thing. There will be a few losers.

Despite having all of the fundamentals in place, a few investments will turn sour. There's no escaping that.

Worse, it's hard to know which ones will turn out to be the losers.

So what to do about this hard truth?

Accept it.

Once you accept this truth, something really great happens: You begin to build it into your calculations.

You become stricter and more disciplined when buying stocks. You buy them at a price that, even when a few go down, the gainers more than make up for the losers.

If done intelligently, the group of stocks taken together, you still come out on top.

That's exactly the approach we take in our Graham-inspired service Microcap Millionaires.

We recently closed our 36th position since inception of the service in 2014. Of these, 4 have been at a loss, while the other 32 have been at a profit.

Importantly, the gains from our winning recommendations have far outweighed the losses from losing ones, ensuring that on a net level, subscribers have made a killing.

Rather betting the house on a couple of stocks, and then expecting them to go to the moon, it is this portfolio-based approach that is the smarter one to take.

And that is what a successful stock-picking strategy is all about!

Happy stock-hunting,
Taha Merchant
Taha Merchant
Research Analyst, Microcap Millionaires

PS: To stuff your portfolio with more winners than losers, sign up for our single most successful small cap service Hidden Treasure. Click here to subscribe.

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