Stop Loss

To me, stop loss means daring to take a loss when I no longer believe in what I’ve invested in. Not just shares, but businesses too. I’ve learned that holding on because I’ve already put so much into something can cost both more money and much more time.

I’m sitting here in September 2010 thinking about an investment I’ve made. I invested with my heart and quite a bit with my head too, but I didn’t do my homework properly.

I’d bought into something different from what I expected

I put a lot of money into the project relative to my own budgets. After a few months, I had to admit what I’d bought into wasn’t quite what I’d expected.

A few years earlier, I’d have kept fighting. But this time, I pulled the plug. I said: Okay, I’m getting out, I have to take the loss, and that’s that.

It got me thinking about what had actually changed. Why could I now do something I’d previously have found so difficult?

I think the answer is experience. More or less every time I’ve held on to something I no longer really believed in, it’s cost me more money and much more time.

And time is sometimes worth more than money. Of course, that also depends on whether you can afford to eat. But for me, the time I tie up in a bad project is a big part of the bill. I share my experiences with both good and difficult business decisions in Iværksætter til jeg dør.

The expensive phrase: Surely it can’t fall any further now

I remember shares from the dot-com bubble I held on to as they fell. Perhaps you know the phrase too: Surely it can’t fall any further now.

Yes, it can. Believe me.

You buy at 100. Then the share falls to 50, and you think it must have hit bottom. Then it’s at 25.

Surely it can’t fall any more now? Yes, suddenly it’s at 10. That’s only a tenth of the original price. But then it falls to 5.

And while you tell yourself falling further is now almost impossible, it can end up at 0.01 or something like that.

That’s an example of how I’ve thought myself, not the price history of a particular share. My point is that a big fall doesn’t in itself prove the next loss can’t happen.

The same applies to businesses. A situation can get much worse than it is today. I think you need to bear that in mind from the beginning.

My stop-loss question: Would I invest again today?

When doubt begins to appear, I ask myself a question: Martin, with what you know today, would you invest in this again?

That isn’t the same as running away as soon as things get difficult. If I can afford the loss and still believe things will improve, holding on can make sense.

But is something fundamentally wrong? Is the management wrong? Does the company keep making bad decisions? Is the industry less attractive than I thought, or are competitors much stronger?

Those are the kinds of questions that matter to me. I try to look at what I know now rather than only at the money I’ve already put in.

There were fundamental problems with a children’s shop website

At one point, I invested in a website with a children’s shop. I thought I could help quite a bit, and I did.

The problem was that some fundamental things were wrong. I don’t want to broadcast them here.

As investors, we kept hearing there was just something that needed sorting out. Once that was done, everything would be golden, fine and good.

Of course, you need to listen to what’s happening. But if deep down you think something crucial isn’t working, you also need to take that doubt seriously.

Will I put in the new money now needed if I look at the project with what I know today? If I hadn’t invested the first money, would I invest the next amount?

If my honest answer is no, I shouldn’t simply carry on. Then I need to let the project fail.

The next 100,000 kroner need to make sense too

You might say: Isn’t investing another 100,000 kroner to try saving the 300,000 already invested a good idea?

It can be if I really believe in the project. If I personally think the problems can be solved and things point in the right direction. These numbers are an example, not amounts from a particular investment.

But if I think we’ll just have the same problems in a month, what have the extra funds saved?

Or if I think the share will fall further because of the financial crisis or other circumstances, why should I ignore that assessment just because I’m already invested?

If that’s how I see the situation, I’d much rather take the 300,000 loss and keep the 100,000 for a new project I see more potential in.

Taking a loss is bloody frustrating. I’m not saying it’s pleasant. Hit, kick, scream, shout and feel annoyed. But then get on with your life.

That’s what stop loss means to me here: Experience helps me stop when I no longer believe in the investment, instead of letting the money and time I’ve already spent drag even more along with them.

If you invest in shares or businesses, it’s important to know when to stop… Best wishes, Martin