Wishful Thinking

One of the adages of the stockmarket is ‘Let your profits run, take your losses quickly.’ Ten years as a stockbroker really ingrained the second part of that adage in me and it proved very useful in my business life. One of the many interesting things about the financial markets is that every morning when you come into work, the results of your decisions are in front of you in numbers in black an white.

There really is no place to hide. Now, it does not mean you will always buy at the bottom or sell at the top, far from it, but you will see if things are moving as you expected. If they are not, what has changed or what did you get wrong? When they do not go as expected, I learned to review my decisions of the previous day and ask myself ‘Knowing what I know now, in the light of any fresh information, would I still make the same decision I made yesterday?’ If not, then it is time to reverse the decision.

Clearly in the markets, transaction costs are relatively low and information flows are much quicker than in regular business. You cannot keep buying and selling factories, warehouses or hiring and firing staff just because trading is not what you expected. However, having the dispassionate mindset is vital. Do not fall in love with ‘yesterday’s decisions’, losses rack up very quickly and it is very easy to throw good money after bad.

Economists call investments made to date which cannot be recouped ‘sunk costs’ and they advise that all fresh decisions should be made ignoring these, once incurred. For many entrepreneurs, the sunk costs might be their time, their emotional investment in their dream or savings they have invested themselves. Whilst being prepared to have a long term strategic vision, it is still vital to have regular tests to check the reality of the plan (an excellent reason for having one!).

It is vital that you apply as much dispassionate reason as you can and ideally use the services of a non-exec to help you maintain objectivism. This might apply to the invention you believe the market is desperate for, the inventory your business owns (which in most cases does not appreciate like a fine wine) or the performance of an employee you like but who is not delivering. It sounds cold but it just might save your financial life.

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