When we have an expectation from anything then it will start creating an attachment towards it. Such attachment can affect us while our expectation does not meet in real. Attachment ties us with particular things and we cannot able to go away from those particular things. So that we should be reasonably expected from our investment and never ever get attached to any of the investment made by us. When our assumptions got wrong then we should exit from the particular investment. But due to ego, attachment towards an investment, we keep on holding a wrong investment also. Many a time, Initial small losses can be transformed to the huge losses due to our attachment towards our investment.

Many a time, we all have experienced our thought – “I will exit my investment when it comes to a break-even” when we are in loss, we keep on thinking that how much more it will go down; let me add more money to the same idea. Such thoughts can kill us without informing us.

We need to focus on capital protection because –

If we fall by 10% then we need to rise by 11% to reach a break-even point. And similarly, 100% require when we fall by 50%.

When we come to know that we are wrong then we should exit from a particular investment rather put more money to it. Many of us make such mistakes where we keep on averaging our losing ideas. We should have a stringent process where we should have a clear exit criterion also so that we should not be affected by emotion. Having a clear process is to work as a blessing for us during the worst time of our investment journey.

Mr. Twain has declined to make an investment which was suggested by Mr. Bell. Mr. Twain considers himself as well informed and well experience but in reality, he has an experience of failure to the investment field. We have to analyze ourselves whether we are really well experienced or not. And we only can perform such own analysis when we do not have an arrogance, overconfidence and ignorant into our mind.

I have seen many investors/analyst who has made plenty of mistakes and wrong investment decision but they consider themselves as a well experienced and more knowledgeable investor compare to others. They are not ready to accept that they have a history of failed investment, they do not realize it and learn from it. They keep on repeating those mistakes again and again. We should come out of from the behavior and work on what we know and what we do not know our strength and weaknesses, in-short self-analysis, knowing ourselves better than others. When we come to know about our strength and weaknesses then we can have a chance to perform to overcome our weaknesses and stronger our strength.

We need to identify that we are wrong and for that, we have to be self-analytic. As we come to know that we are wrong then we must have to admit it and work on come out of it. If we found that our investment was wrong then we should book it without looking to loss or profit. I know it is difficult to do. I also got attached to one of the newspaper business at the initial days of my career and it took one year to admit my mistake and booked losses. But that investment has taught me that when you realized regarding the wrong decision than first go and close the position. Otherwise, it will stop us from focusing on the right decision also.

This is the best way to manage our risk. I can give one example of the same. If I have a one investment idea where I want to make an investment and I am ready to take a loss of Rs.30 per unit of investment. Now, I count 1% of my portfolio (Let’s say as an example, it’s an Rs.1000000) so 1% of Rs.10,00,000 I.e. Rs.10,000. So that I should buy 333 units of particular investment (Rs.10,000 / Rs.30 loss I am ready to take). Here, if I go wrong then also I have taken a risk of 1% on my entire portfolio which helps me to stand for a longer period of time. Percentage of risk is different by person to person and probability of winning and losing from the particular odds.

Read for more detail: Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick