ART OF BOOKING YOUR LOSSES & THE "कभी तो बढ़ेगा" FALLACY

Crux of the article for people with low attention spans and who have self diagnosed themselves with ADHD just because it sounds cooler. If you bought 1 stock for ₹ 100, 4 months ago and today its value is ₹ 20, at this moment you only have ₹ 20! ₹ 100 is just a figment of your imagination. In the present moment, it is your choice to either keep your ₹ 20 in a loss making stock or to actually book your loss and put this money in a more promising company. The thought "I'll take my money out of this loss making stock when it reaches back to the level I invested at" might prove to be the biggest roadblock of your financial journey.

THE ARTICLE BEGINS NOW

Here are the steps to become a long term investor in the stock market:

1. Hear about the glamorous world of the share market from your friends

2. Read the Zerodha Varsity page and pretend that you know more about trading than all other people who have been trading since decades! [P.S. Zerodha varsity is actually an amazing platform for beginners to learn about the stock market. A great initiative by the company which is helping many first timers.]

3. Ignore your inner voice which says "If it was this easy, why isn't everyone doing it" and stoke the voice which says "Even if I make 1% return every day by intraday trading I'll be a billionaire within 5 years! How hard can it be to make just 1% return every day! After all I've read the Varsity page, I'm an expert now!"

4. Dream of becoming the next Buffet or the next Jhunjhunwala but unlike them become rich quickly and without any real experience or knowledge.

5. Choose a penny stock based on the stock tips from moneycontrol and put a significant amount of your money in it and after witnessing a momentary gain, watch all that money get wiped out!

6. Repeat the same experience a few more times as per your risk appetite.

7. Get demotivated, tell people that share market is a casino and its all gambling.

8. Call yourself a LONG TERM INVESTOR because you didn't even bother to take your money out of the loss making stocks you invested in.

Let's reserve the discussion on the difference between a trader, a speculator and an investor for another time. Let's get to the point now. In this article, I'm not talking about stop loss but a stage which comes when we don't know what a stop loss is or when we've ignored our stop loss and have reached a stage where no sensible investor should reach. A stage where we've a huge chunk of our invested money and we don't even care about the money we've left in that stock and we let it be parked there and forget about it. We hope that one day after 2/3/4/5 years it'll bounce back and we can recover the lost amount by selling it then.

I'm sure you know what a 'Sunk cost fallacy' is, if you don't, then it is the reason why people are unable to move on from a toxic relationship or an ex just because they have invested so many precious years in that relationship. It is the reason why we complete our Engineering degrees despite knowing fully well within 1 year that engineering is not what we want to do. We waste another 3 years because we have wasted the last 3 years to come to this realization. A very similar thing happens to us when we lose a huge amount of money in our investment but since we've made such a huge loss we are afraid to book that loss.

We are under a false impression that unless we book a loss, the loss isn't real. Our mind convinces us that if we don't sell the loss making stock, somehow we don't actually have to live with the consequence of the wrong decision we made in the past. The objective of this blog is to make people understand that the loss which you see on your screen even if you haven't sold the stock is very real! It doesn't matter if you sell it or if you keep it! The amount you see today on your screen is the only real amount you have. The amount you invested in the past is just a figment of your imagination today.

Booking your loss will actually help you overcome this mental block which interferes with your logical analysis! Booking your loss helps you think clearly and objectively analyze the choices you have in front of you. Till the time you stay invested in a share, even if it has obvious red flags, you'll keep on illogically betting on it to perform well in the hopes of recovering your money.

So, if anyone reading this is going through a similar experience, BOOK YOUR LOSS NOW! Invest the money in a more promising company with a good track record. Don't fear the red you'll start seeing in your consolidated PnL statement.