We have all heard tales of success where the entrepreneur overcomes all odds and refuses to give in, despite people and circumstances shouting at them to quit. They persist, fight, scrape, hustle and somehow push through and become the success they are today. However, we rarely hear stories of those entrepreneurs who folded a failing business. It is the same with investors. We have heard how George Soros sold the Pound to break the Bank of England, but we are unlikely to have heard of his thousands of losing trades and investments. Cutting losses or quitting takes courage, but it’s not romanticized like victory.
Reality of course is mostly a blend of successes and failures; of pushing beyond reasonable to reach success, or quitting before all is lost. But how do you know when to hold on, and when to fold? In my experience, having experienced plenty of both in business and investing, there is no set formula, but there are some heuristics that might be of use.
Define what failure looks like before you start
Many young entrepreneurs don’t consider failure when they embark on a new venture. My first proper foray into startup world is a good example. It seems crazy to me now, but I didn’t even contemplate the idea of failure before I started. I won’t delve into the details of the business here, but the business failed on every measure. It cost me all our savings and some, and ended up taking me another eight years to bring our family’s balance sheet back to $0. I quit when I had to, not when it would have been helpful. Had I considered ahead of time what the signs of failure might look like, I would have been able to either quit early, or be flexible enough to pivot my approach in time to save the family silver. This certainly applies to investing. Knowing where you are wrong before you invest is a simple but useful rule of thumb.
Detachment from fear and greed
There is an emotional cycle that we experience as risk takers. It is bounded by elation and delusion at its peak and resignation and depression at its trough. Often our worst decisions as investors or entrepreneurs are made during the visceral pull of these emotional extremes. Learning to observe our emotions, rather than react to them, can improve decision making and reduce regret. Within my investing framework, I will often feel like cutting exposure during market weakness, even when I’m within my predefined risk tolerances. At this point, I’m typically feeling self-loathing or resignation. Conversely, I’ll often feel compelled to add to my exposure when a market starts to move in my favour. This is a response to elation. With this awareness, if I’m to take any action at these extremes, it’s to add to my exposure in resignation and reduce my exposure in elation. This has the effect of smoothing my equity curve over time.
Predefining risk and building emotional awareness are two ways to help decide whether to quit or keep charging. These skills can be acquired quickly and inexpensively with intention or slowly and expensively with experience.
Photo by cottonbro studio: https://www.pexels.com/photo/selective-focus-photo-of-a-person-s-hands-holding-playing-cards-6962259/