Let’s Talk in Percentages

I often receive emails or phone calls from people saying, 

“Help! My trading account is down $5000 and I don’t know what to do.” It’s usually followed by “My partner is going to kill me.” 

My first response is “Let’s take a step back. What’s your account size and what percentage does the $5000 represent?”

There are two reasons why we shouldn’t talk in dollar terms.

Firstly, dollars do not equalise account fluctuations. There is a big difference between a $5000 loss on a $10,000 account (50%) and a $5000 loss on a $100,000 account (5%). You don’t hear fund managers talking in dollar terms – they speak in percentages because it enables a direct comparison.

So to get on the same page we only talk in percentages.

Secondly, speaking in dollar terms makes losses a lot more personal. We tend to relate dollar losses with required hours at our workplace to recover the loss. A $5000 trading loss may mean 2-weeks on the job to recoup.

Having that psychological weight only adds to the pressure. And as we know with many things in life, the harder you try, the harder it becomes.

Instead you should get yourself to an almost ‘don’t care’ state of mind or a position where any losses do not make a material difference to your mindset.

To do this requires you to only be trading with money you can afford to lose.

Not wanting to lose money is a type of anchoring bias.

It results in bad positions being held in the hope that it will at least come back to break even at some stage. That focus ensures you ignore all other information that may be more important to the decision making process.

In the last few weeks Dick Smith Holdings (DSH) dropped some 85%. Rather than say SELL many brokers downgraded their recommendations from BUY to HOLD.

Hold for what?

They’re clearly anchoring their opinion on some other information to save face. The fact that the stock was at $2.20 earlier this year seems to have no bearing on the decision.

Opportunity cost is a large expense that is overlooked by most of the financial services industry.

We use a variety of filters on our Long Term Portfolios to stay on the right side of type of stocks like Dick Smith Holdings.