The Backward Thinking That’s Hurting Your Portfolio’s Performance

Almost everything you have ever read about the market is about buying. Which stocks to buy. When to buy them. How to find them. The screens, the setups, the catalysts, the picks. The entire industry is organized around the act of buying, as if the only thing standing between you and wealth is finding the right thing to purchase.

There is almost nothing about selling. Most market participants never recognize that selling has a far greater impact on their results than buying. Buying is the fun part of investing. Selling is the hard, unpleasant work.

This is the great deficiency in market education, and it stems from the fact that most market education is about attracting attention rather than teaching what really works. We have turned buying into a heroic act that is loudly celebrated and left selling as an afterthought, something you deal with later, something that just sort of happens.

The thinking is backwards, and it is one of the main reasons most people who pick their own stocks underperform. They spend all their energy on the buy and almost none on the sell, when the sell is the part that determines what they actually keep.

Conventional Wisdom Is Only Half True

The conventional wisdom is that you get rich by buying good stocks and holding them. There is truth in it. If you are a passive index investor, buy and hold is the right approach and the data backs it up. And everyone knows that Warren Buffett holds his best businesses for decades.

What no one ever talks about, though, is the hundreds of stocks that Buffett has dumped over the years because they failed to live up to his expectations. Buffett is actually a very active investor but the buy-and-hold thing makes for better stories.

For anyone actively picking individual stocks, the buy-and-hold methodology is dangerously incomplete. It makes the buy the whole game and treats the sell as a failure of conviction. With this mindset, selling means you were wrong, or you got scared, or you did not have the patience to let a winner run. Selling becomes something to feel bad about rather than just a good tactic or strategy.

Feeling bad about selling costs people a fortune.

Why Selling Determines Your Returns

What most investors never really think about is that capital is finite. Every dollar you have is either working in a good idea or trapped in one that is not working. You cannot fund your best ideas if your money is tied up in your worst ones. Think about that. If all your capital is tied up in suboptimal stocks for the long term you are going to have lousy returns.

That single fact is why selling matters more than buying. It is not just about protecting gains, though it does that. It is about freeing capital so you can concentrate it where it belongs. The investor who will not sell ends up with a portfolio full of dead money, positions held out of loyalty or hope or the refusal to admit a mistake, while the ideas that are actually working go underfunded because there is nothing left to put into them.

Portfolio management is like gardening. If you don’t pull out the weeds, they choke out the flowers. Weeding is the unpleasant work we don’t want to do. We’d rather just sit back and watch the flowers blossom but if you have too many weeds it won’t happen.

Shame Is the Problem

The reason people resist selling is emotional, rather than logical. Selling a loser feels like an admission of incompetence. You made a decision, it did not work, and closing the position makes the failure real. As long as you hold it, you can still tell yourself it will come back. The moment you sell, you have confirmed you were wrong.

So people hold. They hold losers far too long because selling feels like defeat, and they end up with capital locked in stocks that are going nowhere while they wait to be proven right. The stigma attached to selling is one of the most expensive emotions in investing and that is why we hear so little about it.

One of the most consequential realizations in my trading career is that selling is not an admission of failure. It is just part of the process. A routine, mechanical, unremarkable part of doing the job. You take a position, it does not work out the way you hoped, you sell it and move on. If you do that often enough for long enough there is no emotional reaction. If you want a friend, buy a dog, not a stock.

You Have to Expect the Losers

If you go into every trade with the expectation that it is a winner, then every loser feels like a failure and the losses pile up as evidence that you suck at this. But that expectation is wrong to begin with.

The truth is that many of your trades will be losers. Not because you are bad at it, but because that is the nature of the game. Even the best investors are wrong a large percentage of the time. What separates them is not a high batting average. It is that they keep losses small and let the winners run, without agonizing over every position that does not work.

I have said it many times. If you do not have a lot of losing trades, you are not trying hard enough. Losing trades are evidence that you are testing enough ideas to find winners.

A portfolio with no losers is not a sign of skill. It is a sign that you are not taking enough shots, which means you are missing the big winners that make the whole thing work. The losses are not a failure. They are the cost of doing the work, and the work is what produces the winners.

Why Nobody Tells You This

Part of the reason selling gets ignored is the media environment. Social media, financial television, and the whole ecosystem are built around winning picks. Everyone shares the trade that worked. Nobody posts the one that did not. Your social media feed is a highlight reel of winners, creating the illusion that successful investors just keep buying things that go up.

They do not. They take losses constantly. You just never see that part, because a losing trade does not make good content. The result is a distorted picture of what investing actually looks like, where buying winning stocks appears to be the whole skill and selling never enters the conversation.

There is an uglier side to this, too. When a well-known investor takes a big loss or makes a bad call, the reaction on social media is often glee. People pile on. They can’t resist pointing out the bad calls of the foolish folks on CNBC.

Most of the folks on TV are actually pretty good at what they do, but they’re wrong quite often. There is a schadenfreude in watching a successful person get something wrong, and it reveals how deeply the culture treats losses as shameful. If losing were understood as a normal part of the process, a big investor taking a loss would be unremarkable. Instead, it is treated as a downfall, which tells you how badly the culture misunderstands the role of losing in the game.

That culture is exactly what you have to unlearn. The investors who pile on someone else’s loss are the same investors who cannot take their own, because they have absorbed the idea that a loss is a humiliation rather than a routine event.

The Correct Mindset

Change how you think about the whole relationship between buying and selling. The buying gets all the glory and the attention. The selling does all the work.

Your returns are not determined by how good you are at finding stocks to buy. Plenty of people are good at that. Your returns are determined by your discipline in selling, in cutting the ideas that are not working, in freeing your capital to concentrate where it belongs, and in taking your losses without letting them become a source of shame that paralyzes you.

Get the selling right and the buying takes care of itself. Get the selling wrong and it does not matter how good your picks are, because your best ideas will never have the capital they need to make you rich.

More Investing and Trading From Rev Shark

At the time of publication, Rev Shark had no positions in any securities mentioned.