This dichotomy of loss-cutting versus battling is a constant debate in the world of investing. The “first loss/best loss” philosophy, taught to the author back in the 1980s, emphasizes the importance of cutting losses quickly and moving on from bad investments. This approach was successful during the author’s time managing a hedge fund with his former wife Karen Cramer, where they focused on letting good stocks run and selling bad stocks as soon as possible. Their disciplined approach led to compounded returns of 24% over 14 years. The rigorous process of evaluating and defending stock positions daily helped them identify and eliminate underperforming stocks promptly.
The author reflects on past mistakes made in investments, such as sticking with companies like Bausch Health and Foot Locker despite early warning signs. The failures in these investments highlighted the importance of the “first loss/best loss” philosophy, where holding onto losing positions can lead to significant losses. Learning from these experiences, the author is cautious in evaluating current positions like Starbucks, where a new CEO and persistent guidance cuts have raised concerns about the company’s future performance. However, the author hesitates to cut losses in Starbucks due to the company’s resilience and potential for turnaround through external factors like a takeover or activist involvement.
The author draws parallels between past investment decisions with companies like Emerson Electric and Qualcomm, where missed opportunities to cut losses resulted in regret. These experiences have shaped the author’s approach to risk management and decision-making in the current investment landscape. While the temptation to hold onto underperforming stocks exists, the author is mindful of the potential consequences of not following the “first loss/best loss” principle. The balance between cutting losses and holding onto positions for potential turnaround requires a strategic and disciplined approach to investing.
The author acknowledges the challenges and uncertainties in the investment process, where the fear of missing out on potential gains can cloud judgment. The intense scrutiny and pressure of managing a public portfolio, coupled with the lessons learned from past mistakes, have influenced the author’s current investment philosophy. The ongoing debate between cutting losses and standing your ground highlights the complexities and nuances of decision-making in the ever-changing financial markets. By sharing these insights and experiences, the author aims to provide valuable lessons and guidance for investors navigating the complexities of investing in today’s market environment.
