My piece will be short and sweet today, as we remind ourselves of a simple, yet profound dynamic regarding all of investing. It has been said that the number one and number two rules of investing respectively, are: never lose money and don't forget rule number one. We all know that's a great ideal to shoot for but not the least bit realistic. As investors we understand that we will inevitably have both winning positions and losing positions.
The key, at least in my mind, is understanding how to manage both types of positions.
The "disposition effect" is a behavioral pattern discovered through work in the field of behavioral finance. It describes the natural tendency of investors to sell winning positions while holding onto losing positions. We're going to go into more detail about this in future remarks, but today we'll keep things simple.
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