You don't trade LeBron James

2019-08-10

When most people get their first big win in the stock market, their first instinct is to lock in their win. This is actually a huge mistake.

Let’s say you invested $100 each into two stocks. One of them has doubled, and the other has lost 10%. Now you have two stocks, one worth $200 and one worth $90. Most people look at that result and experience terrible loss aversion. You’ve gotta sell some of that $200 stock, right? What if it goes down!? Go ahead and sell half of it - now you’ve got your original investment back and all of its gains from here on out are free. Right?

Warren Buffett uses a helpful analogy to illustrate why this is wrong. He points out that if you’ve got LeBron James on your team, the last thing you should do is trade him away and replace him with a random player. You want to keep winners on your team as long as possible.

Dumping your winners is a great way to be worse than average. If you’ve got something that’s working, double down. If it’s time to dump something, the underperformers should be the first thing on your list.

How can you apply this to your life? What’s underperforming for you, that you should be doing less of?