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This chapter is from the book

Investing Is a Business

People tend to treat investment as a specialty having to do with picking the right investments and selling them when they become successful. However, investment is a business, just like a hardware store, where items are bought with the intention of selling them at higher prices than what was paid for them and liquidating those items that don’t sell well. It is an inventory management business where losers are eliminated and winners are accumulated. Unfortunately, the investment management business doesn’t quite look at investments this way. For one, portfolio managers and investors are reticent to sell investments at a loss. There is a documented and well-studied psychological fear of admitting failure in the markets. But does the hardware store manager castigate himself for dumping goods that don’t sell? Perhaps a little, but the successful manager dumps them in a sale, hopes to break even, and expands the products that are profitable. In other words, the manager’s ego, while dented slightly, doesn’t interfere with the successful business of selling hardware goods. On the other hand, ego tends to run portfolios, rather than common sense. Not surprisingly, the hardware business and the markets don’t care about ego. The market is neutral, dispassionate, nonjudgmental, and as some egotists anthropomorphize, “cruel.” But to profit in the market, just as in a retail business, ego must be subordinate to reality. Reality is that the business or portfolio manager is not perfect nor is his decision making. The decision-making process depends on too many variables and facts that can be inaccurate, irrelevant, or that can change. It also depends on experience, knowledge, and discipline. Errors in judgment are common and must be rectified immediately, especially in trading. The law of percentages (50% loss requires a 100% gain to break even) is against the indecisive manager when an initial decision is incorrect.

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