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The Most Important Investing Chart You'll Ever See

by , 25 October 2018
The Most Important Investing Chart You'll Ever See
Today I'm going to share one of the most important charts in investing.

As investors, we are risk-seeking when it comes to our losses, but we are risk-averse when it comes to our gains.

What does that mean?

 Well, we feel the pain of loss more intensely than we feel the pleasure of gain. Quite simply, we may like to win, but we hate to lose.
That’s part of a well-known phenomenon and what behavioural finance terms Loss Aversion or Prospect Theory. Loss aversion was first described in the 1970s by psychologists Daniel Kahneman and Amos Tversky.
This is what it looks like…

One of the most important charts in investing

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  • You do NOT need to know anything about investing…
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But, you DO need to know how to get rich (including what penny stocks to buy, when to buy them, and how much to pay for them)…

This is where I can help.

This chart shows one of the most important challenges that ALL investors must overcome to succeed in the markets – the tendency to prefer our losers over our winners.
What do I mean by "prefer"?
It's all about how we respond to gains and losses in the markets. The vertical axis above measures what economists or academics would describe as of "value" or "utility."
You can think of it as the emotional impact of our gains and our losses.
As our gains get bigger, the emotional impact of those gains wear-off. It’s great, if we get a 100% gain.
But if we get a 200% gain – financially, you know it's twice as great, but, emotionally, it doesn't feel twice as great.
On the other hand, as our losses increase, the impact of those losses doesn't taper off in the same way that the impact of the gains tapers off.
If you take a 25% loss, that hurts. But if you take a 50% loss, it hurts a whole lot more.  A 90% loss is a real killer.
As losses grow, they consume us. And we get attached to those losing positions.
Many investors, after getting burned a few times, realise that taking big losses is a bad idea. Not only is it tough on your portfolio, but it's tough on you psychologically.
Even worse, it discourages you from taking advantage of future opportunities.​
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So what can you do to stop taking big losses?

It’s simple.
Many experienced investors know when to cut their losers.
They simply set a simple stop loss and stick to it. A stop loss is an important tool you use to limit your losses when buying shares.
It will prevent you from falling into the trap of hanging onto losers too long.
One of the most influential investors of all-time, Philip Fisher, in his book Common Stocks and Uncommon Profits said…
"More money has probably been lost by investors holding a stock they really didn’t want…than from any other single reason."

See you next week,

Joshua Benton,
Managing Editor,
 The South African Investor


The Most Important Investing Chart You'll Ever See
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