Lessons from All-Time-Greats: Bernard Baruch’s Inability to Cut Losses

Bernard Baruch was one of the greatest investors of all time — who shared his many investing lessons in his memoir — Burch: My Own Story.

Despite his tenure on Wall Street nearly a century ago, these lessons are still true. today Many of his investment failures came from the same issue — his inability to cut losses. Here are some of his top lessons…

Lesson 1: Don’t buy too many different securities. Better to have a few which can be watched.

• Why does it matter? Diversification is important, but having enough time to keep up and manage each company also matters.
• According to a past study, 12-18 stocks achieve 90% of the benefits of diversification.

Lesson 2: Learn how to take a loss and do it quickly. Don’t expect to be right all the time.

• Why does it matter? As your losses grow, the return needed to return to breakeven gets exponentially larger.
• According to the William O’Neil rule for selling stocks, investors should cut losses at 8%.

Lesson 3: Periodically reappraise all your investments to see whether changing developments altered their prospects.

• Why does it matter? Companies are constantly evolving and it’s fine to change your mind as the direction of the company changes (i.e. disruption, regulation).
• It’s better to see the change early and take the loss— momentum can often drive a stock price much lower or higher.