"Professionals treat gambling as a job. They keep calculating odds and act only when mathematics point in their favor. Losers, on the other hand, itch for the action and enter one game after another, switching between half-baked systems."
— Alexander Elder
On the other hand, there are these fools who have no system at all. They're the ones who have their heads up their (you know where) and delude themselves it is only a paper loss.
Unfortunately, paper losses are real losses, and they are reflected in the account balance. More importantly, holding onto a losing investment with the hope that it will turn around is unproductive because that money could provide more value had it been invested elsewhere. Moreover, there's no assurance of knowing that the loss will ever be recovered in its original investment.
Needless to say, money should always be deployed in an optimized way by selecting the most promising investments at any given moment. Hanging onto a losing position to avoid booking the loss makes no real sense, and it is often a very costly mistake. It, therefore, makes perfect sense to realize losses and move on, unless there are simply no better investments. Unfortunately, most investors also fool themselves into believing that they have already made the best trades.
(Simply put, bad practice produces bad habit. Not only is this detrimental to your account in the long run, it fosters a sense of false hope. Maybe you got away this time, but you might not get away next time.)
— Alexander Elder
On the other hand, there are these fools who have no system at all. They're the ones who have their heads up their (you know where) and delude themselves it is only a paper loss.
The Fallacy of Paper Losses
The familiar term, "paper loss", is most popular among long-term investors. It is frequently used to justify keeping a bad investment because closing it would convert the paper loss into a real loss. Roughly translated, it means: “I made a bad investment decision and lost a ton of money, but I am still confident that over time my decision will prove to be correct.”
Unfortunately, paper losses are real losses, and they are reflected in the account balance. More importantly, holding onto a losing investment with the hope that it will turn around is unproductive because that money could provide more value had it been invested elsewhere. Moreover, there's no assurance of knowing that the loss will ever be recovered in its original investment.
Needless to say, money should always be deployed in an optimized way by selecting the most promising investments at any given moment. Hanging onto a losing position to avoid booking the loss makes no real sense, and it is often a very costly mistake. It, therefore, makes perfect sense to realize losses and move on, unless there are simply no better investments. Unfortunately, most investors also fool themselves into believing that they have already made the best trades.
(Simply put, bad practice produces bad habit. Not only is this detrimental to your account in the long run, it fosters a sense of false hope. Maybe you got away this time, but you might not get away next time.)
