Investment Wisdom from Yoda: Fear of Loss Leads to the Dark Side
Posted on July 5, 2010
The other day I was watching one of the episodes from Star Wars, and Yoda provided some great advice to the young Skywalker, that I think is perfect for investors:
Yoda said: “Fear of Loss Leads to the Dark Side.”
Why is a fear of loss dangerous for investors? Aside, from the fact that fear will always cause you to make rash decisions, without a proper risk/reward analysis of the situation, I think there are three specific situations where a fear of loss leads to unprofitable consequences:
1. A fear of loss prevents you from taking the calculated risks that can lead to profit.
2. A fear of loss forces you to sell or give up too soon on a position or new business venture.
3. A fear of loss makes you unwilling to admit failure, take losses, and move on.
When investing in the stock market, or any other business, one needs to anticipate and suffer through short-term losses, simply because not every decision will be correct, and if you are going to be right, you must be early. In other words, losses are inevitable, even in winning positions. I think if one accepts that truth, fear can begin to dissipate. To combat fear, one needs to stay diversified so as to be able to sustain the losses from failures, and have the courage to take on new risks. In addition, one needs to have the patience to wait thru the short-term losses, which are common to all great successes.
A key issue, of course, is when you should throw in the towel on a short-term loss, since obviously not every investment or business idea will pan out. There are numerous guidelines for this type of decision (patience again is a key attribute), but a key lesson is not to make any decisions out of fear of some loss or because of external price movements. An objective analysis of the situation away from the computer and “market noise”, without a fear of losing money or any other negative emotion, is essential. Sometimes the simple question: Am I Making this Decision out of Fear?, is enough to guide you in the right direction, since we soon discover that nearly all our fears are exaggerated.
Have some additional tips on how to control fear? Leave them below in the comment section.
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