How To Win By Quitting

Annie Duke, a former professional poker player who won more than $4 million during her career recently explained in a cnbc.com editorial how quitting can be a winning formula in the world of investing.
She first mentioned a quote by legendary football coach, Vince Lombardi, who said, “Winners never quit, and quitters never win.” In the world of investing, Duke believes the opposite is true where she lives by the mantra, “Quitters often win, and winners often quit.”

How can quitting lead to winning?

In Duke’s own words:

“When it turns out that your initial choice wasn’t a good one, don’t stick it out simply because you chose it. Just quit.”

The problem with many investors is they’re hoarders when it comes to investments. They have a personal attachment to their investment choices. They hold on to bad investments or bad investment strategies far longer than they should.

This phenomenon has its roots in behavioral finance and is commonly known as the “disposition effect” where we tend to hold on to losing investments for too long. It has a lot to do with pride and our human aversion to admitting we were wrong. Selling a losing investment would be admitting defeat.

Some investors will convince themselves that what they’re doing is virtuous – that persistence will pay off. Only when they’re near rock bottom will they finally admit defeat and let go. This is not a winning formula.

Investors who are winning the investment game all had to quit the same bad investment strategy at one time or another. That bad investment strategy? Playing the stock market – where the odds are stacked against you.

If 90% of investment professionals can’t consistently beat the market, what chance do the rest of us have? The 20-year annualized return of the average retail investor is only 2.5%. Average annual inflation over the past 20 years has been 3.22%. When factoring in inflation, the average retail investor is losing .72% per year.

Negative returns don’t stop retail investors from sticking with a losing formula. Many refuse to quit.  

In her editorial, Duke also had this to say about quitting, “If you are stuck deciding between two options, you should choose the one that is easier to quit.” What she’s getting at, is you should be flexible. The one that’s easier to quit gives you more flexibility to pivot to go in a better direction.

I don’t necessarily agree that you should choose the investment option that is easier to quit. That option would always be stocks because of their liquidity. What I believe is that once you do land on a winning option, you should stick with it.

The bottom line? Quit the losing strategy and once you find a winning strategy, don’t quit.

How do you know you’re in a losing strategy? If you’ve lost more than once. Everyone has lost money on more than one stock.

How do you know you’re on to a winning strategy if you haven’t gotten to the finish line yet? Look to those investors who have followed that same strategy and won.

What’s an investment strategy successful investors have pivoted to?

Successful investors have long pivoted away from losing in the stock market to winning in private markets.

They prefer lower risk alternative assets not correlated to Wall Street – especially assets that cash flow and that are backed by a tangible asset.

Income producing businesses, real assets, and private equity are examples of alternative assets that have consistently proven to be winners – providing investors with above-market risk-adjusted returns through cash flow and appreciation.

Profiting from these assets won’t come overnight however. Most have long investment windows – needed to fully realize the associated business plan and to fully maximize profit potential.

With persistence these winning strategies can be highly rewarding. You just have to quit the losing strategies first.

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Michael Foley

Michael Foley, president and CEO of Humabilt Capital, oversees the entitlement process, funding, and operations for Humabuilt Capital. Mr. Foley has been a full-time real estate investor since 1995 during which time he has developed hundreds of single-family homes, townhomes, condominiums, and apartments. Mr. Foley started his investment ventures in Long Beach, California, and has expanded to Apex and Durham North Carolina. Mr. Foley is a graduate of the University of California at San Diego.