The Ten Percent Solution

 

believe, but I'm convinced that many don't even know whether they're up or down.

"I remember one client who had been dealing with the retiring broker for fifteen years. He had started with fifty thousand and, fifteen years later, he had fifty-five thousand. 'That's better than a loss,' he said. He didn't understand that if he had just left the money in the bank, he would have had substantially more than fifty-five thousand. Like so many others, he didn't understand compound interest.

"A major reason people lose money with their brokers is that they constantly go against the wisdom of let your profits run and cut your losses. Most investors and brokers cut profits and let losses run.

"Good investors admit their mistakes and sell, taking small losses. Those losses are easily covered by the large profits created through a combination of buying value and exercising patience . . . patience that most of us don't have.

"Bad investors always think that their stocks are going to come back up to at least what they cost them. Brokers know they look bad when they choose a loser, so, rather than selling and accepting a loss, they perpetuate this myth. A stock doesn't know you own it—it's not going back to twenty-two so you can get out even. So, you often end up holding as the stock goes lower and lower."

"James, are you saying brokers are dishonest?" Cathy probed.

"No, no ... I didn't mean it that way. I think reluctance to admit a mistake is human nature, not deliberate dishonesty. Sometimes we can't even admit to ourselves that we were wrong.

"I'd say ninety percent of the brokers I have known are professional and honest.