I purchased a meal kit service company's stock for $4 a share. Watched it climb to nearly $5 per share within a few weeks. Felt really smart.
Felt really dumb when I didn't pay attention for a few days and realized the stock had plummeted to $3 per share. (And no, I didn't set a stop-limit order.) Quarterly earnings revealed customer acquisition costs (CAC) had almost doubled and churn rate was up nearly ten percent.
Hold that thought.
You had high hopes when you hired Joe. Unfortunately, and despite your best efforts to turn him around, he's still a mediocre performer. He's slow. He's inaccurate. And he drags the team down.
You had high hopes when you contracted with ACME to be your new supplier. Unfortunately, it hasn't panned out: Quality is spotty, deliveries often late, resolving problems takes much too long.
So what did I do? My investment was down 25 percent. I really wanted to make up my loss. So I held on to it.
"If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes."
Or, to put it another way: Would I buy that stock today? Would you hire Joe today? Would you bring ACME on as a supplier today?
In my case, I wouldn't. The company's fundamentals had turned sour poor. Competition was increasing, both online and off-line as supermarkets entered the market. (Amazon was even rumored to be interested.) I couldn't see a clear path to improved financial results, much less profitability. And there were other investments I felt much better about.
The problem was... I hated the idea of selling for such a loss.
The Power of Loss Aversion
I'm not alone: Research by Daniel Kahneman, the Nobel Prize-winning economist (and author of one of my favorite books, Thinking, Fast and Slow) shows that we tend to feel the pain of a loss over twice as much as we enjoy a gain.
In short, we're wired to hate losses.
Which means not selling my stock allowed me to avoid a loss, even though holding on to that stock only meant delaying the eventual loss... and missing out on potential gains from a different investment.
Which means not firing Joe helps you avoid a loss, but also means you miss out on having a superstar in that role. Not "firing" ACME helps you avoid a loss, but also means you miss out on working with an outstanding supplier.
Knowing what you now know, would you hire Joe? Knowing what you now know, would you bring on ACME today?
Knowing what I now knew, would I buy that stock? No. (That's why I finally took my emotions out of the equation and sold it.)
The 'Today' Decision Model
Buffett is known for his buy and hold approach to investing. As Buffett says, "... when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."
But that doesn't mean, once he makes a decision, that he stops assessing those decisions. For every stock Buffett has held for over a decade, there are plenty of stocks he sold within one or two years.
After all, if he wouldn't buy them today... why should he hold them today?
The same is true for most decisions. If you wouldn't engage your advertising firm today, why keep using them? If you wouldn't hire your consultant today, why keep using him?
If you wouldn't promote a certain employee today... launch a certain product line today... or even start a certain diet today... don't just stay the course. Use the information you now have to make the right decision.
Regardless of what your original decision might have been.
And don't think that changing your mind makes you look stupid. No less an authority than Jeff Bezos says a key indicator of high intelligence is the willingness to change your mind.
Even though changing your mind about a certain decision might feel like a "loss"... at least you won't make a bad situation worse.
And, more importantly, you won't miss out on the chance to make that bad situation a whole lot better.