The Independent Voice of Southern Methodist University Since 1915

The Daily Campus

The Daily Campus

The Independent Voice of Southern Methodist University Since 1915

The Daily Campus

The Independent Voice of Southern Methodist University Since 1915

The Daily Campus

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The single most important thing an investor should know

All right, I’ll tell you: You must protect your investment account and always cut your losses short. That’s it. This is the most important rule any investor can know and practice. Think about that – this can apply to all areas of your life; studying for class, working out at the gym, 2 a.m. this Thursday at Home Bar – know when to cut your losses and get out.

Whether you are a seasoned professional investor or new and inexperienced, the most difficult lesson to learn is that you will not be right all the time. Furthermore, if you do not learn to cut your losses quickly, sooner or later you are going to be completely wiped out and suffer catastrophic losses. Unfortunately, ladies and gentlemen, a solid education, expensive suits, imported automobiles, massive triceps, larger-than-life egos and the like are potentially deadly substitutes for a sound personal methodology demonstrating a rule based approach to investing.

Why is that? Because of hope and fear. The second we buy a stock we expect it to make us money, and when we have to sell it and incur a loss we find it emotionally devastating and painfully hard to admit that we were wrong. So, you’d rather ride it out and hope and pray that the price comes back up.

If that’s not bad enough, why does it always seem that just as soon as you sell your shares, the price immediately jumps up? Now you are inspired to feel even worse about your recent investment decision. But it would be foolish to believe that you were wrong for selling and that cutting losses short is a bad habit to practice. Well, don’t!

Intelligent investors, how you handle losses is imperative to your long-term success as savvy investors.

Think about this: Did you (or mom or dad) buy car insurance last year? Did your car get totaled? If it didn’t, were you kicking yourself for wasting such money? Probably not. And will you still purchase car insurance next year? Do you purchase car insurance because you think you are going to total your car? Absolutely not! You purchase it to protect yourself from the faint and remote possibility that if something does happen, you will not have to endure a tremendous loss that will be difficult to recover from. Alas, this is exact purpose of remembering to always cut your losses short.

Benjamin Brown is a senior finance and economics major. He can be reached for comment at [email protected].

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