I started giving financial advice in Ryujinmura village

“I’m somewhat a celebrity on Financial Twitter.”

I’ve tried many ways to answer the question, “what do you do for a living?” 

Because what I do is somewhat unconventional, I try to have some fun with it.

I defend the law and order of the internet by arguing with internet trolls.

I tell people why they’re wrong to invest in shitcos.

I am like the investing version of OnlyFans.

Celebrity on Financial Twitter doesn't sound so bad anymore, does it?

A friend I made on the trip was stumped with an investment decision.

He asked, “I’ve a stock that’s down more than 90%, what should I do next?”

I was intrigued, and asked him what stock he bought.

“Clover Health.”

Why did you buy the stock?

“My buddy recommended me to buy it during the COVID period and I’ve been averaging down all the way.”

Honestly, I’m not quite sure what this company does but it isn’t just unprofitable with negative cash flow, it’s unprofitable even on a gross profit margins level when he bought it during 2021.

This means that for every product they provide, the cost of producing that product was more than the price they were charging—it was losing money simply by breathing—we haven’t even gotten to the operating, marketing, general & administrative expenses yet.

The reason I am sharing this story is that something like this isn't unique to him. There have been many people who have jumped into the stock market during the COVID period without understanding what they are investing in. They traded based on Reddit, Twitter, or friends' recommendations.

Now, I’m not sure if this stock will recover, go to the moon or drop further. Nevertheless, I know that many won't learn how to read financial statements or research the company.

If you are in a similar situation, or know someone in a similar conundrum, forward this advice to them:

You don't have to make your money back the way you lost it.

My advice is to sell it, take the loss, and then invest it into a diversified basket of securities. 

He was uncomfortable with that advice, because taking losses feels painful. Besides, it’s already down more than 90%, it is now a small amount, why not just hold it and see what happens?

I mean… sure we could do that. But I went on to explain further about two of the most important investing behavioral biases that plagues most investors: loss aversion and sunk cost bias.

Loss aversion bias

Losing is psychologically twice as painful as gaining. Realizing losses is so painful that most investors put off pulling the trigger. As a result, they engage in the horrifying practice of—a loss isn't a loss until you sell—letting the money sit there, hoping for the best.

Sunk cost bias

We have a tendency to continue with whatever we’ve invested money, effort, or time into—even if the investment no longer makes sense. Ever started a show which was an absolute delight the first three seasons and became absolute thrash the next two seasons but you watched it anyway even though you don’t enjoy it? That’s the sunk cost bias at work.

This bias goes beyond investing, it’s pervasive in relationships and career choices too (stares uncomfortably).

These two biases would have a disastrous impact on your investing results. Because the cost of a poor investment decision isn’t just the money you lose, it’s also the opportunities you forgo when you lock in your capital in those investments.

Of course, selling and taking your losses won’t apply to everyone, not when you have done your due diligence, sized your positions well, didn’t use leverage and have conviction that the stock market is wrong about the stock.

But if you bought solely based on stock tips out of fomo, and know that you don’t have the time, energy or interest in doing your due diligence, then cutting your losses and investing these capital into a diversified basket of securities would probably be the wise thing to do.

Again, you don’t have to make your money back the way you lost it.

I hope this short story has been helpful to you.

Invest wisely,

Thomas

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