Admitting defeat on a share is psychologically difficult, but history has shown that selling at the right time differentiates winners from losers in the investment world. But why is selling such a difficult decision for so many investors?
It is one of the most challenging because it forces an investor to confront the most basic of emotions — pride — while simultaneously asking us to overcome our built-in reluctance to embrace loss. In our experience the best way to find the strength to cut our losses when it is the best course of action is to put in place a robust and unemotional process of reviewing your investment thesis and selling when this changes.
A typical trading approach looks something like the following. You take a number of active positions, sizing your exposure based on the risk and return you expect from each stock. Poorly defined limits mean you probably end up with more money allocated to risky shares, because you estimate the profit opportunity to be higher than it is realistic to expect.
Investors who fall prey to these investment blind spots are likely to lose money on the stock market, or at best find that winning stocks compensate only partially for the negative performance of the losers. In February 2020. trade fairs and exhibitions generated almost two-thirds of Informa’s operating profit, but as the coronavirus outbreak began to gather pace Informa revealed that an increasing number of its shows were being postponed or cancelled. Its flagship health and nutrition show in the US — as well as a number of its important Chinese and Japanese trade fairs — were indefinitely put on hold.
This is a powerful algorithm that is not unfamiliar to long-term investors. The pandemic changed this. Initially we expected the effects of global lockdowns to be short term in nature, with minimal impact on Heineken’s long-term volumes . However, as the pandemic deepened and movement and celebrations across key markets were curtailed, the investment case changed.
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