Sunday, March 22, 2009

Your First Loss Is Your Best Loss

Jim Cramer’s reputation as a source of investment wisdom is not at its peak right now, but in the environment today his second commandment of trading is good advice. From a 2005 article on

Good trading, no matter what it's based on, technicals, fundamentals, the stars, the news, requires a level of discipline that goes against human nature. We are taught in life to be patient, to let things work out, not to be hasty, yet none of that works when it comes to trading. You have to be willing to cut and run, to use that "flight," not fight, instinct that we supposedly are born with but suppress wholeheartedly when we are grown up.

That's what the second commandment of trading is about, and that's why it is the second commandment of trading:

“Your first loss is your best loss.”

I genuinely believe that most trades need to work almost immediately for them to be right.

John Reeder over at Real Property Alpha has an excellent post making the case that this is true for CRE today, complete with a great example (Lennar’s role in the Newhall ranch development). As John notes, I’ve made the opposite argument –selling in this environment reinforces a downward spiral in values which is hard to stop, with unfortunate consequences for all. It is a classic Prisoner’s Dilemma / Tragedy of the Commons problem, and unfortunately the best individual bank strategy makes the problem worse in the long run. We have met the enemy…and he is us.