[[Start here]] → [[What works in stocks?|what works]] → [[maintain your discipline|discipline]] → [[when to sell]] → keep losses small --- A lesson from investor behaviour is that [[we feel the pain of losses twice as much as the joy of gains]]. We’re risk-seeking with losses (which makes us hang onto losers), but risk-averse with gains (which makes us sell winners too soon). The value of keeping losses small is no better illustrated than in the graphic below which illustrates the “Asymmetry of Loss”. ![[asymmetry-of-loss.png.png]] If you lose money, the gain required just to recover the loss grows by a power-law the larger the loss. If you lose 50% on a position, that position will need to double just to return you to breakeven. If you lose 90%, it needs to gain 900%. This is such an important mental model. Burning the graphic into our minds helps considerably when thinking about what to do with losers. Instead of thinking about cutting losses as an admission of a mistake, or as an unnecessary commission to your stockbroker, think about them as ********an insurance premium.******** There’s great comfort in paying car or home insurance, so why not consider small losses as a premium paid to preserve your capital? More than this, if you think “keeping losses small” is just a trader’s maxim, think again. None other than the great Warren Buffett has hammered home two rules of investment. > ”**Rule #1: don’t lose money. Rule #2: don’t forget the first rule.**