Thread by @AdamB1438

Best reason to "cut your losses and move on" in investing - because your mental capital is more valuable than your physical capital.

Work through an example of how this plays out:

If you're a generalist stock picker w 10 positions, and you expect them to make an average of 50% and you're right about 2/3 of the time,

your portfolio outcomes might look like this:

3 stocks - down 50%
6 stocks - up 50%
1 stock - up 100%

Portfolio return = 25%
Not bad!

So now let's say one you're really frustrated by one of the 3 that went down.

What's a better use of your time and attention? Finding a new position, or waiting for the market to prove you were right about the last one?

Your average new stock pick has an expected return of 25%, right? And your whole portfolio is still up! So your portfolio is really well-served by you just going back to the beginning of the cafeteria line so to speak and finding 10 new positions.

Let's say you spend a lot of time on one of the ones that went down 50%.

Do we really expect it to return 25%?
Is it more likely to do that than a new stock you pick?
Allocation is 5% and the value of the portfolio is now 125. Are you really only spending 4% of your time here?

Frustrating as it may seem, even if you thought you were right on this one - you can't assume it goes back up like you thought it would in the first place! After all, our base rate said that you were going to get 3 out of 10 wrong every year.

So for my big losses, the better use of time and effort in almost every single case was to "take the L," and a smaller amount of capital.

Then come back later with ALL the time and attention I blew on that mistake, and try to learn a lesson.

If I can learn a lesson from taking a loss on a stock that got down to 5% of capital, that's actually a way of decreasing risk and improving returns on the other 95% of the portfolio too.

(I'm bad at this, but getting better. Helps to write. Thanks, y'all!)