Photo Credit: Chris Seufert
I have read a story about the greed of a turkey catcher from William J O’Neil’s “How to Make Money in Stocks“. The story actually originated from Fred C. Kelly, mentioned in his book, “Why You Win or Lose“.
Here’s the story:
“A little boy was walking down the road when he came upon an old man trying to catch wild turkeys. The man had a turkey trap, a crude device consisting of a big box with the door hinged at the top. This door was kept open by a prop to which was tied a piece of twine leading back a hundred feet or more to the operator. A thin trail of corn scattered along a path lured turkeys to the box. Once inside, the turkeys found an even more plentiful supply of corn. When enough turkeys had wandered inside the box, the old man would jerk away the prop and let the door fall shut. Having once shut the door, he couldn’t open it again without going up to the box and this would scare away any turkeys lurking outside. The time to pull away the prop was when as many turkeys were inside as one could reasonably expect.
One day he had a dozen of turkeys in his box. Then one sauntered out, leaving 11. “Gosh, I wish I had pulled the string when all 12 were there,” said the old man. “I’ll wait a minute and maybe the other one will go back.”
While he waited for the twelfth turkey to return, two more walked out on him. “I should have been satisfied with 11,” the trapper said. “Just as soon as I get one more back, I’ll pull the string.”
Three more walked out, and still the man waited. Having once had 12 turkeys, he disliked going home with less than eight. He couldn’t give up the idea that some of the original turkeys would return. When finally only one turkey was left in the trap, he said, “I’ll wait until he walks out or another go in, and then I’ll quit.” The solitary turkey went to join the others, and the man returned empty-handed.”
Now, let’s take a typical example in the stock market – an investor bought a stock at $20 after receiving a hot tip. He was so confident that the stock will go up in value, at least to a price objective of $25. To his dismay, the stock dropped to $18 the very next day. He was disappointed but told himself that it will go back to $20 and eventually to $25. It dropped further to $15, and he finally accepted the fact that it will not go to $25. At this moment, he is ready to forgo any profits and just hopes it will go back to $20, where he will sell and settle for a break even. By holding longer, the stock price drops to $10, and he totally give up on all hopes that the stock will go back to $20.
The moral of the story for a trader is to CUT LOSS when he is wrong. It is normal that everyone wants to win in all the investments he makes. However, a trader cannot be right all the time and it is important to limit losses to small amount to protect his capital. Even if you are a buy-and-hold investor, you really need to do a lot of homework before your purchase. Like it or not, there are times that you may wrong. You must be able to bite the bullet and sell the stocks if the business does not work out to what you expected it to be in the first place. Failing to do so will amount to great losses!
Truth: Investors are reluctant to accept small losses
Myth: The loss is temporary and will return to the original price
Truth: Small losses become bigger losses
