What to do when you look back and see that you made a mistake in your investments? – 05/18/2023 – From Grain to Grain

There is a saying that goes: only those who make mistakes. In investments, it is no different, that is, if you invest, you will make a mistake. Although much is warned about the critical points in investments, even experienced investors end up facing the frustration of dealing with them.

This occurs because, most of the time, the failure is not explained by the lack of technical knowledge. And it’s about dealing with these moments and how to avoid them that I’m going to talk about.

I have been working with investments for more than half a quarter of a century. I can confidently say that most investment frustrations stem from two feelings: greed and over-optimism.

When we cannot control these two feelings, we expose our portfolio to greater risk than is necessary or appropriate.

Even disciplined investors have regretted heavy losses. These same investors, when they look back, are not satisfied with the naivety of the past decision.

If you invest, you will probably go through this. You’re going to look at the past and you’re going to see that you made a mistake. So what to do in these moments?

Here are two lessons I learned from my own bullshit.

Tip 1: When discovering the mistake made, do not persist in the mistake. You shouldn’t keep an asset just because you’ve had significant losses with it. Consider whether you would buy the asset under current conditions if you didn’t have it in your portfolio. It is often better to let go of the past and seek a slower recovery with another.

Tip 2: Forgive yourself. Many investors cannot forgive themselves for the mistake they made and this ends up disturbing other investments and even their professional and personal life. Remember, the past mistake is no longer under your control. And if it’s not one of the things you control, say, ‘Then it’s not my concern’ – Epictetus.

Knowing that at some point you will be betrayed by one of the feelings above, there is a simple way to disciplinedly avoid the magnitude of the impact on your wallet.

This is the main lesson I learned and that I have always followed:

Never concentrate your portfolio on a single investment so that if you’re wrong it compromises your portfolio.

I see many investors who get excited about a stock or a derivatives trade and fall in love with it. They end up believing that nothing can go wrong.

Workers often buy almost all of the resources they have accumulated in the stock of the company they work for. When we work in a company, we often get carried away and commit the foolishness of compromising, in addition to our salary, hard-earned savings.

Remember, entrepreneurs get rich by selling the shares in the company they created to third parties. Therefore, if you are a hard worker, beware of seeking wealth by buying.

No single asset in your portfolio should be more than 10% of your entire portfolio. Unless it’s the shares of the company you founded yourself or it’s a really risk-free asset.

If you limit exposure, even in moments of greed and euphoria, your loss will be limited and frustration will be easier to deal with.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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