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are you making this wealth-killing portfolio mistake?

are you making this wealth-killing portfolio mistake?

Did you know that most investors irrationally sell winners and hold on to losers?

Jordan Belfort
March 27, 2024

Your Brain is Betraying Your Portfolio 🫠

Did you know that most investors irrationally sell winners and hold on to losers? In the next 5 minutes, we’re going to teach you how to avoid common pitfalls that the majority of investors make.

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Today’s Rundown

Investment Cognitive Biases👇️ (Insight)
Mistakes Investors Need to Avoid 🚫 (Story)
Using the “Mark-to-Market” Method 💪 (Action)

Investment Cognitive Biases 👇️

(This section teaches business insights to implement into your life)

👉 Insight: It’s irrational to sell winners and hold losers.

“The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

Successful investing requires overcoming several deeply ingrained cognitive biases. You must resist the siren call of the herd mentality, even if that herd is composed of Wall Street's finest lemmings in pinstripe suits. Three of the most destructive assumptions are:

Anchoring bias - Allowing the original purchase price to influence future decisions, rather than evaluating fundamentals objectively. This "anchoring" leads to holding losers too long based on sunk costs.
Optimism bias - Assuming an investment will rebound due to overconfidence and the tendency to be overly positive about desired outcomes, ignoring signs of deteriorating fundamentals.
Paper loss fallacy - Believing unrealized losses are not real until a position is closed or believing paper gains are safe profits before being realized.

With these deeply ingrained, yet obviously idiotic assumptions, investors fall into destructive patterns that cause them to hold losers…not unlike Michael Scott losing his savings to a pyramid scheme, declaring “bank-rupt-cy" at age 40, or selling his condo on eBay for a loss…

Mistakes Investors Need to Avoid 🚫

(This section contains a business story that you need to know)

From the Desk of Jordan Belfort:

When is the right time to sell, and what do you base your decision on? On how much you’re up? On how much you’re down? On the original price you paid?

Like an idiotic version of Schrödinger's’s cat for investors, here are two ways people think about loss when their portfolio is overwhelmingly down:

Mindset 1: They don’t want to sell anything because everything is down so much. They think they can just hold for now and wait for things to come back. “It’s just on paper,” right? Why take a paper loss and turn it into a real loss and eliminate any chance they had of getting their money back?

Mindset 2: Sell everything, regardless of the price, so they could put this nightmare behind them and start all over again. The need to close the book on a painful experience… to rid yourself of all the negativity and pessimism that’s associated with it. It was the equivalent of dying by death from a thousand paper cuts.

Convincing stuff, right? I want you to imagine owning a stock portfolio that’s been using this strategy for the last two years. In other words, when a stock was down, you simply didn’t sell. Instead, you followed this playbook, and you held the position, remained supremely patient, and waited for the stock to come back.

On the flip side, though, when a stock was up, you actually did sell. In other words, once again, you followed this playbook, and you sold the positions, locked in a profit, and continued on with your trading. This strategy seems like a surefire winner and a long-term recipe for success. Or does it?

Here’s the reality: Does a trading strategy that has you selling all your winners, to lock in the profits, and holding on to your losers, to avoid booking the losses, actually make any sense? The strategy has two huge flaws, both of which are fatal:

It’s built on a foundation of self-delusion.
It fails to address the most important factor of all when it comes to deciding if it makes sense to sell, whether you’re up or down.

To put it bluntly, you’re like an ostrich sticking your head in the sand, convinced that as long as you don’t look up and assess the situation, there’s no possibility of danger. Or, in stock market terms, as long as you don’t sell a stock that’s gone down, then you’re not actually down. Well, let me give you a little news flash: You. Are. F**king. Down!

Just because you haven’t sold a stock and closed out the position does not mean that your money hasn’t been lost.

Key takeaway: Don’t be the ostrich in the sand talking about losses “on paper.” Understand when to hold long term and when you’re out all together!

Using the “Mark-to-Market” Method 💪

(This section provides actionable tactics you can apply right away)

At the close of each trading day, a mutual fund goes through each stock in its portfolio, one by one, and takes its current market price—the mark-to-market—in order to determine the “net asset value,” or NAV.

Here’s how you can do the same:

Find the current market price (the mark-to-market)
Multiple this number by the total number of shares you own
Add all of those marks together (along with any cash on hand)
This total number will give you your total current assets
Subtract any liabilities (margin loans, commissions, fees, etc.)
Divide that number by the total number of outstanding shares
This final number is your NAV

So, what’s my point with all this? Even the SEC, as inept as they are, does not allow mutual funds to use the price that they originally paid for a stock to calculate their NAV. Why? Because it would be patently ridiculous. And wildly deceptive.

Here’s the bottom line: In the absence of marking each stock in their portfolio to the current market price, an investor has no way of knowing if they’re buying into a fund that consists of 100 percent losers that simply haven’t been sold yet. Obviously, the same is true with your own stock portfolio.

Just because you haven’t sold a stock that’s gone down doesn’t mean that you haven’t lost the money. You have. The money is gone.

Wolfy Memes of the Week 🤣

Bite-Sized-Reads 📚

[Read] Unlock all of the secrets that make up Jordan’s entire investment playbook in his new book, The Wolf on Investing.

[Read] Elon Must thinks every child should learn these 50 cognitive biases.

[Read] Learn more about the mark to market (MTM) method.

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Publisher: Jordan Belfort

Editors in Chief: Brock Swinson and Davis Richardson

DISCLAIMER: None of this is financial advice. This newsletter is strictly for educational purposes and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.