Don’t Fall for the Safe Position Fallacy


People like to win and hate to lose.  Basic in the psychology of people who are investing is the idea that if you make money on a position, you have won, but if you lose money, you have lost.  You also see silly ideas like “You don’t lose money until you sell.”

“You don’t lose money until you sell.”  Bad advice.

I’ve found that I’m subject to the same impulses.  When I was younger, I used to sell a stock if I made a certain gain.  For example, I would sell if I made $1,000 so that I could “take a safe position or  “lock in the gain” and eliminate the risk of the position turning south and turning into a loss.  Because I was taking a gain, I had “won,” but if I let the money ride and the stock went back down, I would have “lost.”  Chock one up for the “w” column.  Nevermind that I had to put the money somewhere else and possibly take a loss there.  I was a winner.  This behavior meant that I sold my gainers and held onto my losers.

Because I didn’t want to take a loss, which would then mean that I would “lose,” I held onto the losers, waiting for them to at least get back to the price at which I bought them.   Sometimes I’d hold them and they’d continue on down until I finally sold them in despair or just stopped looking since they weren’t worth enough to sell and pay the commission. Sometimes they would go back up to where I bought in eventually after a year or two of waiting.  Then I would quickly sell because, according to my ludicrous logic, that way I didn’t lose any money.  I didn’t “lose” since I got out what I put into the stock.  Now, in reality, while I had the same amount of money, perhaps a year or three had passed. Those dollars didn’t buy as much as they did when I invested them, so I was still losing money. Even worse than the loss to inflation, however, was the loss of time. I lost the ability to grow my money over those two or three years in a good stock because I refused to sell a loser.  I just ended up even after that time period instead of seeing gains.

After a few years of doing this, selling winners and holding losers, I ended up with a portfolio of stocks I didn’t really want.  I’d sold the stocks that were doing well and probably continued to climb.  I held the bad ideas and the poorly run companies, selling them if they actually turned around just as they started doing well.

In investing, there is nothing as important as time.

If you’re a serious chess player, you know about something called “tempo.”  Controlling the tempo means that you get to choose your moves and your opponent needs to react to what you do.  This keeps him or her from being able to do things that you don’t like.  Someone set back on their heels all of the time can’t throw an effective punch.

Time in investing is important as well.  Investments grow with time, and you make the most during the years at the end when you have the most money.  Each year at the end can mean hundreds of thousands or even millions of dollars in additional wealth.  At the beginning, when you first start investing, it may seem like you have all of the time in the world, so waiting for a stock to turn around doesn’t matter.  Waiting to start investing is even worse.   When you’re young and have fifty years ahead of you, you’ll figure it won’t matter if you wait five years to start investing.  You’re wrong.  At the end, you’ll wish you had just five more years before retirement.

Selling your winners early costs time.  Plus, you’ll still need to put that money somewhere, so you really aren’t reducing risk

When you sell, you need somewhere to put that money.  If you leave it sitting on the sidelines, you are losing time.  You never know when the next huge run-up in stocks will come, and you don’t want to be sitting on the sidelines in cash when that happens.  Selling just because you have a gain may mean getting out of a great company just when they are starting a big climb and putting your money into a stock you don’t like as much.  You might also be buying a stock ready for a fall because it has just completed a big climb and become overbought.

Another strategy is to take a “safe position.”  Here you sell a few of your shares so that you now have gotten out all of the money you invested, leaving a little in case the stock continues to climb.  That leaves you needing to move the money you made “safe” somewhere else, putting it at risk again.  The other choice is to leave the money in cash and be losing money to inflation each year it is not invested.  Why leave a company that is doing well and perhaps you really like to buy into another one that you don’t like so much?

Holding your losers costs time.

Every year you sit holding onto losing positions for them to go back up to where you bought them is a year you could have invested in something that was growing.  There are times when a great stock will go through a sell-off, or a company will drop in price as they reorganize and wait for their industry to recover.  There are also times when the whole industry or the whole economy declines, causing some great stocks to go down in price. Oil producers are in just this position right now, the good and the bad.  These stocks should be held and perhaps your positions added to during the downturn.  This is different, however, than holding stock in a company that is performing poorly and will continue to perform badly, waiting for it to recover.

I did this with Cisco stock, holding from about the year 2000 through about 2012, waiting for it to recover and grow.  I eventually sold the stock I had bought for about $20 at $30 or so.  True, I made a 50% profit, but I should have seen my money double or even quadruple in that period of time.   I lost all of that time when I could have been invested in a growing company instead of an old, tired, bureaucratic company whose time has passed.

Churning is costly.

When you sell a winner, you need to pay brokerage commissions (both for the sale and for the purchase of something else).  You also need to pay taxes on the gain, perhaps at a rate of 25-40% when you include federal, state, and local taxes.  If you stay invested, the money rides tax deferred until you sell.  This means your money, even the money that would have been paid out in taxes, compounds.  Over a lifetime, this could be hundreds of thousands or millions of dollars.  (I use that phase a lot, don’t I.  This is a costly thing to get wrong.)

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

When Investing, We’re Often Our Own Worst Enemies

About five years ago I changed from my normal style of investing, whatever that was, to what I call serious investing.  I now find only the best companies – those that make me really excited because they have a strong history of earnings growth, little or no debt, good prospects for future growth, and a great management team in place.  I then buy a significant position – 500 to 1000 shares – over a period of time, buying on dips and stalls, and plan to hold indefinitely as the company grows and matures.  I’ll often find just one or two stocks in a given industry and concentrate there, rather than spreading out to several companies in the same sector.  I do this in addition to being invested in a diversified set of mutual funds in my 401K and to a lessor extent in my IRA and taxable accounts, just in case I do badly at stock picking in my taxable account.  In 2004 I had probably 20 stock trades to list on my tax return.  For 2014, there were none because I’m buying and holding, letting the money compound tax-deferred.

This strategy has paid off well over the last several years.  Rather than lagging the markets by unknown amounts as I did before (I never really checked that hard), I’ve been beating the market, and by sizable amounts in some years because I’m putting my money into only the best choices.  I’m sure that some years I’ll lag the markets since some years my picks may be taking a pause, having run up in past years, but over long periods of time I’m hoping to pick a couple of stocks that grow like Microsoft or Home Depot and provide 1000% or 10,000% returns over a decade or two.

Another thing I’m doing is buying larger positions.  I found that in the past I would selects a good stock, but 100 or maybe 200 shares, see the price go up maybe 20 or 30 points in a good pick, only to make a few thousand dollars.  Now when I pick well, I can make life changing gains.  I then shift some of that money into mutual funds to diversify and keep the gains I have and let the rest stay with the company that has done well (assuming it still seems like a great company).  Sure, I’ll have some bad picks, but a 100% gain on one stock will wipe out a 100% loss on another (which almost never happens – a 50% loss is more likely).  A 500-1000% gain on a stock will do a lot to make up for bad choices.

In the past, I would also sell fairly often.  If a stock gained enough so that I had made a $1000 profit, I would sell out, telling myself that I was “selling high.”  What I was really doing was selling my winners and keeping my losers, leading to a portfolio full of losers after a period of time.  Now when I buy I plan to stay invested unless the company fundamentally changes and I don’t like the change.  I don’t worry about the economy or the markets because I know I have the best companies that will just emerge stronger than ever.  I plan to let my money compound over years and decades and grow into truly sizable positions.  If something gets too big (meaning that it would hurt me significantly if it went to zero the next day) I’ll sell a few shares and cut the position back down to size.  I might also sell covered calls for a period, although I’m finding that doing so just sets me up for the risk of seeing a big fall in the stock.  Plus, I usually find I would be better off just selling the stock since it may go well above the strike price before the expiration date comes and the shares get purchased.

Given that things are working pretty well with this strategy, you would think that I would be sticking with it, and for the most part I am.  Still, I find myself sometimes reverting to my old ways.  I might see that an old, stodgy company with little opportunity for growth that has a good dividend and buy some shares.  I might buy a hundred or two hundred shares, planning to come back later and pick up more shares until I build up the position, only to forget about it.  I then see the company double in price,  leaving me wishing that I had kept building the position.  

Probably the worst thing I did was my actions last summer, when I decided that I would try to add “protection from inflation” by adding oil and other energy companies.  Never mind that stocks are natural inflation hedges in themselves because stock prices will go up as dollars become less valuable.  These oil development companies were doing well only because the price of oil was high.  I’m not sure how I expected to protect myself from inflation by buying into companies that produce a product that was already highly inflated in price, but there I went.  Most of those positions have seen a drop by 50% or more as oil fell back down to earth and worse yet – the Saudis have made fracking unprofitable and clearly show they plan to keep prices this way until all of the frackers have left the market for good.  Because I diverted from my standard plan, I ended up buying into an overpriced market.  The only good company I bought was Greenbrier, a producer of rail cars, including oil tanker cars.  Because they are more diversified, they have other businesses to support them even if oil shipments from the Dakotas cease.

Another place where people often do themselves in is in their 401k accounts.  If you put 10% of your paycheck into your 401k, invested it split between a large cap fund and a small cap fund, and did this for your whole career, you would never need to worry about retirement.  Unfortunately, a lot of people tap into their 401k accounts after ten or twenty years, end up spending it all, and then complain that 401k plans aren’t as good as pension plans once were.  Note that pensions only provide maybe 5% returns, but people aren’t able to take the money out until retirement.  People are actually far better off in 401k accounts, which can easily provide 8-10% returns, but only if they leave the money alone instead of spending it at 40 or 50 and then starting all over again.  It is the last five years, after investing for 40 years, where the real gains are made.

Got something to say?  Have a question?  Please leave a comment or contact me at

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

You Can Beat the Market

Many people try to “beat the market,” which is to say that they try to get a better return than some index such as the Dow Jones Industrial Average, the S&P 500 Index, or the Russell 2000 index.  There are many strategies that are tried, including looking for patterns in the prices of the stocks, buying stocks considered to be undervalued, finding stocks that are going up and buying in, hoping that they will continue to go up, and trying to find stocks that are likely buy-out candidates.  While some people may beat the market for a period of time, these strategies rarely work for longer than a year or two.  If someone actually does find some strategy that works because of some inefficiency in the market or something, other people pile in and the strategy no longer works.

There are a few people who do beat the markets, however.  One of the most famous people to do so is Warren Buffett, but there are hundreds, perhaps thousands of others who have done so as well, although perhaps not to the same extent.  The strategy they use is available to all and isn’t subject to the same issues that dooms others to failure.  Perhaps the strategy also goes against human nature, which wants a quick return, and that keeps too many people from using the same strategy to the point where it no longer works.

This strategy is what I refer to as serious investing.   It is not for those who want to invest for entertainment.  It is for those who want to beat the markets and become financially independent.  It takes some degree of stock picking, but more so it takes discipline and patience.  Lots and lots of patience.  

So what is this strategy?  Here are the steps:

Step 1:  Give in to the fact that you have no control over the markets and what they will do to your portfolio in short periods of time.  Anything you know about a given stock or the economy is already known by millions of others.  Any idea that you have about the effect of this or that on this company or that industry, others have as well and they are making trades at the same time you do.  The reason that great parking space is open is because the guy is parked over the line and no one else could park there either.  If he weren’t parked poorly, it wouldn’t be there when you pulled up.  Accept the fact that the markets will do what the markets will do and you will not outperform the markets by jumping in and out.

Step 2:  Start thinking like a venture capitalist.  Venture capitalist put their money into companies that they think have lots of room to grow.  They also find companies that have a very high probability of success and only buy in if they can get a good price that will allow them for a big return if things work out.  They then put their money in and plan to sit and wait for things to happen.  They don’t make a small gain and jump out.  They wait for the huge returns that make up for the companies that don’t work out.

Step 3:  Invest regularly.  Remember step 1.  You’ll never hit the timing just right.  The more often you invest, the more you average out the prices you pay and improve your cost basis.  Plan on making an initial investment, then plan on buying more on dips and falls.  This means putting aside money regularly so that you can acquire more shares.  

Step 4:  Make significant investments.  If you make only small investments in several different companies, you might as well be investing through mutual funds because that is what you are creating.  Find your best companies and focus your resources on them.  Spread out into different sectors of the markets, but only buy your top pick in each sector.  Larger positions mean much larger profits when your positions pay off.

Step 5:  Only invest when you’re really excited.  Don’t buy a stock just because you have some money to invest or it has a decent dividend.  Find stocks that have great prospects and make you very excited about where they may be in five to ten years.  Develop a watch list of these stocks and then buy the one that have the best price when you have cash available.

Step 6:  Sell when things change or a position gets too large.  If you buy a company because they have a great line of sportswear and then they start selling dress clothes, get out.  Likewise, if a position grows to the point where it constitutes a significant portion of your portfolio, cut the position back to manageable levels and put some of the money elsewhere.

Step 7:  Be in it for the long haul.  Truly great, life changing profits are made over decades, not months.  Why sell out just when things are getting good?  Find a great company that has a great products and room to grow, then don’t worry about the small ups and downs.  Wait for the huge payoff that comes from years of compounding.  

Got something to say?  Have a question?  Please leave a comment or contact me at

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.