Hope Is Not A Strategy

Here is a question I get all the time, either directly or from colleagues on behalf of clients:

“I bought [INSERT RANDOM STOCK]. It is down 50%. Should I sell it or hold it?”

The answer should be obvious and it is that you sell ASAP. I kind of hate to say it (okay, not really), but if you need to ask someone like me this question, you had no business buying the damn thing in the first place. Note that the fact the stock is down 50% is basically irrelevant here. You should not take a position in a security if you have no framework in place for updating your views on the basis of new information.

There are lots of different ways to play the game. You can immerse yourself in 10-Ks and 10-Qs and try to find great businesses selling at reasonable prices. You can take the view that “price is all that matters” and trend follow or whatever. There are all kinds of sensible strategies for making money.

Hope is not one of them.

If you own something that has halved and the only reason you have for holding it is “gee, I really hate the idea of locking in a loss” then you are in trouble. No one will be able to begin helping you until you first help yourself by exiting the position. Hopefully it is at least in a taxable account and you can write it off. You can think of the slightly milder after-tax loss as discounted tuition.

When people talk about “dumb money” or “the suckers at the poker table” they are talking about hope-based investing.

8 thoughts on “Hope Is Not A Strategy

  1. Even worse than a friend coming to you is when a client (or, in my case, an FA or FA’s client) comes to you after they disregarded or did the opposite of your advice and, then, with the stock down 50% / the bond off 20% / the portfolio a mess / etc. asks you what to do.

    I’m sincerely okay with someone not taking my advice – I’m no genius and we are all adults – but if you decide not to take it, then don’t come back when your plan doesn’t work and ask me how to clean it up.

    And even worse than all that is when a family member, whom you are doing a favor for – and not getting paid a penny for it – does it. It’s hard – and I give them many chances – but at some point, you even have to fire non-paying family member clients.

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