There’s an old adage on Wall Street- Cut your losses short and let your winners run!

Famed Fidelity manager Peter Lynch has a take on the Wall Street advice by saying, “Selling your winners and holding your losers is like cutting the flowers and watering the weeds.”  Warren Buffet thought the line resonated so well that he asked Lynch if he could use it in his annual report that year.

The idea is to minimize losses (the weeds) while holding on to winners (the flowers).

Investors tend to take small profits on positions and hold losers, often all the way down.  While not usually the original investment plan, it becomes a natural tendency for people to cash out early on the upside and stick with a poorly performing investment for too long.

Why do investors act in such ways?

Through field studies and lab experiments, researchers have found clear discrepancies between what people plan to do with their money and what they actually do with it.  The Chicago Booth report linked below comments on research conducted over two years of an online brokerage with about 188,000 traders in 150 countries.  This online brokerage requires investors to set gain and loss limits before buying an asset, and then it tracks any changes the investor makes to the limits initially set.  The results show that traders were most likely to widen the loss limit when the position went down and were also likely to sell out of the positions that went up before reaching the targeted gain.  

This research sounds like investors are cutting the flowers and watering the weeds.  What do you think?  Click here and let me know!

~ Brian Kasal- The Leadership Matrix

Click here- The Two BIG Strategic Mistakes That Investors Make

P.S.- Did you see my last Leadership Matrix post? Are You Ready for the Eclipse?

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