“Cut your losses,” they tell each other on Wall Street. Though few can do it well or consistently, it is still good advice. And it doesn’t apply only to the stock market. It applies everywhere.
Florence Graham, better known by her business name Elizabeth Arden, found herself dead-ended in her early thirties. She was employed as a clerk and beautician in a New York beauty salon.
The years were slipping by, the pay was miserable, and the prospects for advancement were not encouraging. She wanted to quit and try something else. Friends argued with her: “You’ve invested a lot in that job. Why abandon it? Why lose what you’ve got? Stick around. Maybe it’ll pay off if you give it time.”
She faced a decision very much like that a Wall Street investor with a sagging stock. Should she hold on and hope for an improvement in luck some day in an unknowable future? Or should she cut her losses right away, abandon the investment, and free herself to seek better luck somewhere else? She decided to cut her losses She quit the job, opened a business of her own and was a millionaire not many years later.
Lucky people have the knack of doing that, and it is one of the chief contributors to their good fortune. The knack is not easy to acquire. Wall Streeters often talk as though it is , and so do a lot of people like the fellow across the hall, stuck for life in a mire of bad luck. If the knack were easy, a lot more people would have it and a lot more would be lucky. It isn’t easy. I’m not going to kid you. But it is a knack you must acquire if you would be lucky.
As you enter any new venture – an investment, a job, a love affair – you cannot know how it will work out. No matter how carefully you lay your plans, you cannot know how those plans will be affected by the unforeseeable and uncontrollable events that we all luck. If the luck is good, then you stay with the venture and enjoy it. But what if the luck is bad? What if the bottom drops out of the stock market? Or the seemingly limitless promise of that new job vanishes in a corporate upheaval? Or your love affair sours when a rival suddenly appears?
The lucky reaction is to wait a short time and see if the problems can be fixed or go away, and then, if the answer is no, bail out. Cut losses short. This is what lucky people habitually do. To put another way, they have the ability to select their own luck. it with bad luck, they disregard it, freeing themselves to seek better luck in another venture.
The unlucky, by contrast, are always getting themselves stuck – sometimes for life – in bad relationships and losing money ventures. They typically complain that fate has dealt them bad hands, but that usually isn’t the problem. The unlucky receive no more bad hands, but that usually isn’t the problem. The difference is that the unlucky don’t have the knack of selecting luck. Incapable of discarding a bad hand, they can only sit and suffer while bad luck becomes worse luck.
One reason why luck selection is so difficult for most people is that it almost always involves the need to abandon part of an investment. The investment may be in the form of time, commitment, love, money, or something else. Whatever it is, you leave some of it behind when you discard a bad hand.
You buy a stock at one hundred dollars, and the price abruptly drops to ninety dollars. In the absence of compelling reasons to think the sag will reverse itself, you probably ought to cut your loss and sell out immediately. Only by going that can you free your money to seek better luck in another investment. The problem is that the act of discarding this bad luck will require you to abandon part of your original one hundred-dollar investment. If you sell, you leave ten dollars behind.
For some, that is so hard that it is impossible. The unlucky investor talks himself out of it. “Things aren’t as bad as they look! The price will go back up!” So he hangs on. The price drops to eighty dollars. Now he’s stuck twice as hard. If he couldn’t abandon ten dollars, how is he going to abandon twenty dollars?” He is mired in his bad luck. Instead of having his money out chasing better luck elsewhere, he has allowed it to get trapped, perhaps for years.
Two psychiatrists, Stanley Block and Samuel Correnti, studied the “born loser” and reported on this unhappy breed in the book Psyche, Sex and Stocks. They found that the inability to abandon part of an investment is one of the loser’s outstanding traits. Leaving part of oneself or one’s money behind is an experience that troubles everybody to some extent, but the chronic loser is troubled more than other men and women.
The affliction is crippling. Unless the loser overcomes it, he is all but certain to remain a loser – and a loser not just in the investment world. This kind of person will get taken to the cleaner’s in a poker game, for example. To be lucky in this game you must discard bad hands when you get them. This always means that you must leave some of your money behind in the pot, and it hurts – but you must do it or go broke. The loser cannot hear to do it. Instead, this unlucky player gets stuck with whatever unplayable hands fate and the dealer want to hand out.
The same loser is likely to get stuck in soured love affairs, for essentially the same reason. “I’ve given so much of myself to this relationship. I’ve worked at it so hard. All that time, energy and commitment – how can I just abandon it?”
And you often find the same loser trapped in job situations that have been hit by hard luck. Eric Wachtel, the management consultant and executive recruiter, observes that people will sometimes allow themselves to be trapped by concerns that are really quite trivial. “Pensions, for instance,” Wachtel says. “I once approached a woman about a potentially terrific new career opportunity. It could have changed her life. She was going no place where she was. But she wasn’t interested. She said, “No, I’ve got X years invested in this job. Another couple of years and I’ll qualify for a pension.” It wasn’t much of a pension, but just because she wasn’t willing to abandon it, she passed up a chance of a lifetime.”
Wachtel reports that the woman remained dead-ended in the job he tried to lure her away from. Bad luck changed to worse luck. Her discouragement was reflected in her work, which grew careless. Finally she was fired. She undoubtedly felt bitter about her bad luck, but she could have discarded it.
Another reason why luck selection is difficult for most is that it often requires a painful confession: “I was wrong.”
To return to Wall Street for a simple example, let’s say you’ve bought a stock at one hundred dollars and it has slumped to ninety dollars. Obviously, buying it was a mistake. It was not by any measure a stupid mistake. Nobody can see the future. You can’t, your broker can’t, the president’s economic advisers can’t and your five-year-old niece can’t. To buy a stock or anything else whose price later slumps is not dumb’ it is only a case of bad luck. But it is an error, and if you are going to cut your loss, you must admit that error to yourself, your broker, your spouse, and perhaps others.
For some, that is even harder to do than abandon an investment. The loser’s response is to seek excuses for not admitting the error. “I was right to buy this stock. Time will vindicate my judgment. The price will go back up. I’ll come out looking smart in the end.”
There is a trivial example of this difficulty that you have probably experienced many times in your life. You are in a car with your family or riding a bike with friends, heading for some unfamiliar destination. You come to a fork in the road. Lacking clear directions, you make a random choice. You ride for a while. It begins to become apparent that you have chosen the wrong route. At what point do you admit it?
Some would admit it fast and backtrack before a great deal of time is lost. Others, however, grimly drive on for miles. It hurts them that much to admit the error and discard the bad luck. Men seem more prone than women to this kind of difficulty behind the wheel of a car. Women’s magazines enjoy publishing cartoons about that male quirk. But in others areas of life, women have as much trouble as men in admitting error and getting out of a bad situation.
Getting out of a soured love affair is another example. A favorite theme of novelists for centuries has been that of a woman who ought to bail out of an affair but can’t. Almost always, in fiction as in life, one part of the difficulty – one component of the trap – is an inability to say ” I was wrong.” Flaubert’s Emma Bovary knows she should cut her losses and withdraw from the profitless affair with Leon, but she cannot make herself do it. Bad luck turns to worse luck, and in the end she kills herself with poison. Tolstoy’s helpless Anna Karenina has similar hard luck in her affair with Count Vronsky. She finally chooses to end the long losing streak by throwing herself in front of a train.
Of course it is not easy to bail out of a gone-wrong love affair as to reverse directions on a highway. There are degrees of difficulty in luck selection. Backtracking to correct a wrong choice of route is relatively easy for most. Selling a bad investment is harder. Backing out of a futureless love relationship may be the hardest and most complicated of all such loss-cutting acts.
But it is a technique you must practice if you seek good luck. Since you cannot see the future, there is only one way to find out what luck you have in a given situation: enter the situation and see what happens. But with this Fifth Technique in your toolbox, you will always be ready to discard your luck if it turns out to be bad.
We’ve talked about pessimism before, and we may find it useful now to take another look at this hard-to-define state of mind. Some problems involving pessimism may have been troubling you as you tried to come to grips with this difficult Fifth Technique.
In our studies of the Fourth Technique, run cutting, we noted that lucky people often seem to behave in a pessimistic way when dealing with runs and streaks of luck. Instead of hoping for long runs, they expect only short ones. They habitually jump off before runs have reached their peaks.
Similar pessimism seems to be involved in luck selection. If an optimist buys a stock at one hundred dollars and it drops to ninety dollars, he is unperturbed – or at least pretends to be. “Oh, I don’t care!” he says cheerfully. “The price will go back up! Everything will turn out all right in the end!” In the same situation, a pessimist is more likely to pick up the phone, call his broker and sell out.
Paradoxically, the pessimist’s approach is more often the lucky one. The pessimist, habitually bailing out when hit with a 10% to 15% price drop, may suffer a string of small losses while waiting for a big gain. But he has two major advantages over the optimist. First, the pessimist can never get caught in a major crash. And second, he can never get his money stuck in a situation of long-term stagnation.
There are many speculators – in stocks, commodities, currencies who sell out automatically on a 10% to 15% price drop. Such programmed selling appeals to some but not to others. Whether it is for you will depend on your temperament. However, it works only in the case of a speculative entity having a precisely known market price. There are many other areas of life and luck, of course, in which it isn’t possible to arrive at such precise valuations; what is the value of a job? A love affair? How can you tell when its “price” has dropped 10%?
You cannot, of course. But you can tell when it has begun to turn sour. And when that happens, you can make use of the same healthy pessimism that serves the lucky speculator.
But now we had better pause and agree on what we mean by “pessimism.” As used here it doesn’t refer to a state of chronic gloom, a long face, or a habit of expecting only bad things to happen. The kind of pessimism that characterizes the lucky is really a fairly cheery state. As we’ve noted before, “pessimism” may not be exactly the right word. “Realism” might be a little better. To define it as precisely as possible as it applies to the Fifth Technique, it is the habit of avoiding unfounded optimism.
Unfounded optimism is dangerous. On Wall Street, it is a killer. It is the habit or tendency to expect things to turn out well, even when there is no tangible reason to expect any such thing.
The lucky approach is to insist on seeing such evidence. Let’s say you’re in a career situation that has turned sour. Promises made when you were hired haven’t been kept, or your mentor has retired early, or the company president’s nephew has been moved in over your head. Bad luck has hit you. The “price” of the job has fallen. What do you do?
The unlucky optimist would cling to empty hope. “Things are bound to get better! I’ll give it time. It’ll all work out. Maybe it’s all for the best. Things are never as bad as they seem!”
As a lucky realist, you would look at the situation differently. You would recognize, in the first place, that things usually are as bad as they seem. In fact, often they’re worse. You would say to yourself, “I’m willing to be optimistic, but I’ve got to be shown some reason why.” And then you would study the situation. Is there some likelihood that the problems will go away? Or do you have some realistic hope of fixing them? If so, stay aboard. If not, get out and go looking for better luck elsewhere.
This fifth technique is without doubt one of the hardest techniques to master and for some it is unequivocally the hardest. It is hard because it requires a kind of pessimism, or unsentimental realism, that doesn’t come naturally to may. What makes it still harder is that there are times when, in retrospect, you wish you hadn’t applied it.
You buy a stock for one hundred dollars. It sags to eighty-five dollars. You sell out. And then it soars to two hundred dollars. That hurts.
Or you quit a job that wasn’t taking you anywhere. Unforeseen events then abruptly change the shape of the company. The person who took over your abandoned job gets boosted to astonishing heights of rank and pay. That hurts, too.
Or you’re playing poker. Your hand is a probable loser, so you decide to cut your loss and fold. Watching the next cards fall, you observe that, against the odds, your hand would have taken the pot if you had stayed. Painful? Indeed.
But such dismaying outcomes do not happen often. Much more often what starts to go wrong stays wrong – or goes wronger. In a souring situation, with no compelling reason to think things will get better, you are always right to cut your loss and go. You are right even when, in retrospect, you turn out to have been wrong.
Lucky people, as a breed, are able to live with the knowledge that some decisions will turn out wrong. This is part of their general habit of accepting risk. “You take risks going in and you take risks getting out,” Bernard Baruch once said. “If you were to insist on 100% certainty , you would not be able to make any moves at all.” So spoke an extremely lucky man.