In life and in business there is much to be learned from studying the most successful people and companies. Let’s talk about having made a bad decision. By analogy, let’s refer to the wisdom of one of the greatest companies in the world, INTEL and then take up the cause by visiting the wisdom of some of the world’s greatest investors.
In the case of Intel, they test their components early and often to catch any potentially bad product before it gets too far into the value chain. That way they catch a bad part at the earliest possible stage and are able to act quickly to change the part before it causes costly repairs to an expensive finished product. Catching a loss early is the least costly stage.
As well, millionaires who made their money by investing have learned to apply the catch-losses-early principle when putting their money to work.
Whether successful companies or millionaires, both apply the principle of cutting their losses at the earliest possible stage. You should, too.
The world’s greatest management consultant, in my opinion, Peter Drucker, recommended systematically abandoning products and services as soon as they become unproductive. He cites that when investment failed to carry their own weight it is time to abandon them to make room for better investments. The message is repeatedly similar: by allowing an unproductive decision to continue too long, you allow it to get further into the value chain and to amplify its lack of contribution by stealing time, resources, or efforts from an alternate and better activity or decision. Bad decisions, per Drucker, “steal from the future”.
Even the best plans can often get derailed. When that happens, act quickly to make the appropriate changes. Famed investor, Charles H. Dow, cautions, “The general rule is to stop losses within [a narrow range]”. Decide early on what constitutes a good or bad decision, how you will recognise if the outcomes are meeting objective and be disciplined. Such measurements can help to identify what Andrew Grove of Intel once called “Trigger Points”. There is no reason, no situation, no excuse for failing to have clearly defined outcomes by which to measure decisions EARLY enough to limit losses.
“This policy of limiting your losses is similar to paying for insurance premiums. You reduce your risk to exactly the amount you are willing to take…the winning investor who cuts losses quickly and closely; wants to protect against the possible chance of a larger potentially devastating loss from which it may not be possible to recover.” [Source: How To Make Money In Stocks by William J. O’Neil. McGraw-Hill, Inc., New York. 1995. p. 92] This advice and wisdom goes as far back to 1902 when another world famous investor admonished, “You must remember that you can be wrong and that the way to protect yourself against wrong judgement is to place a stop loss…” [Source: The Truth of The Stock Tape…Rules for Successful Trading and Investment by William D. Gann. Financial Guardian Publishing Company, New York, 1923. p. 21]
When making any decision, it is in your best interest, and especially that of your employer, that you have “…thought it through first, understand the risks, and have a plan to ensure that those risks are manageable.” [Source: Upside, Downside: Simple Rules of Risk Management for The Smart Investor by Ron Dembo and Daniel Stoffman. Doubleday Canada. p.114]
“The risk-savvy investor makes no investments that could lead to unacceptable losses under the worst-case scenario.” [Source: ibid. p.121]