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“What’s the biggest mistake you see your subscribers making?” Meb Faber asked me on his podcast recently.
It’s a great question… And I’ll share my answer with you today…
“It’s always the same,” I began…
Individual investors let their losers ride… and cut their winners.
They do the exact opposite of what you need to do to make money.
It’s so challenging to learn [to do it right]. The best thing I can do when I hire young people is to tell them, “DON’T OPEN AN ACCOUNT.”
They first need to learn what’s right – and know it down in their bones – before they start trading.
Because trouble starts as soon as people start investing their own money and trading and they DON’T already have these ideas down:
1) Don’t let a small loss become a big one, and
2) Don’t cut your winners early.
That’s the biggest thing that individual investors have a hard time with. And it’s crushing.
You can see this idea at work every single day. Here’s an example I gave on the podcast…
Look Meb, we’re looking at China. China rose by triple-digit percentage gains – three separate times – since 2006. There’s a strong likelihood that sometime in the next five years, we’re going to see a triple-digit gain in China.
Let’s say you buy today, and then you cut your loss at 15% if you’re wrong. And then you buy again, and you cut your loss again at 10% if you’re wrong. And then you buy a third time, and you make a 150% gain.
So what we did there is we cut our losses early, and we let our winner ride. And that is the correct way in my opinion – and in my experience – to make money.
Keeping your losses small is one of the best ways to protect your gains. But as I explained on the show, it can be hard to let go of your losing trades…
Most of the biggest problems [individual investors have] are in letting small losses become big losses.
Even in the case of the Putin example [that I shared here in DailyWealth yesterday], I cut my loss at a massive 50%…
You might say, “Jeez, I’m already down 50%. Why don’t I just see how this plays out?” But by cutting our loss, we live to fight another day.
My friend Alex Green said it well… “Think of your portfolio like a rose garden – you need to trim your weeds and let your roses bloom.”
Most individual investors do the opposite… They let their weeds become bigger weeds. And they trim their roses before they even start to bloom. Do that long enough, and all you’re left with is a worthless pile of weeds.
Check out my interview on Meb Faber’s podcast… The episode comes out on his website tomorrow.
And I urge you to listen to more of Meb’s podcasts… In my opinion, he’s one of the world’s top investing analysts. He has his guests discuss the most important questions in investing. And he’s a super nice guy.
You can learn more about Meb and his podcasts at www.MebFaber.com.
