By Emily Burt, MBA, CFA
It sounds simple, but it’s one of the hardest disciplines in investing — for individuals and portfolio managers alike.
Rule #6 asks us to do two things our instincts resist: stay with what has worked (without getting spooked by volatility), and admit when something isn’t working (without wishing your way back to breakeven). Behavioral finance helps explain why these mistakes are so common: losses hurt more than gains feel good, we anchor to our purchase price, and we crave the relief of “locking in a win.”
Research points the same way. Barber & Odean (2000) found that frequent trading tends to reduce net returns. Odean (1998) documented the “disposition effect”: investors sell winners too early and hold losers too long.
For investors of all experience levels, the challenge is often emotional. A losing position can feel like a verdict on your judgment, so the temptation is to “wait until it comes back.” A winning position can feel fragile, tempting you to take profits to avoid regret. Both reactions are understandable — and both can be costly over the long term.
Staying patient with your investments is crucial — most stocks need time to deliver meaningful long-term gains. Selling too soon risks losing out on the best opportunities for wealth creation.
For portfolio managers, the pressures are different but the psychology is the same: risk in looking “wrong” by diverging from the benchmark, and the urge to act — especially when clients, headlines, or committees demand answers. Holding a winner through drawdowns can be as uncomfortable as selling a loser while the story still sounds plausible.
That’s why we treat Rule #6 as a process. The goal isn’t to be stubborn with winners or ruthless with every dip — it’s to stay anchored to fundamentals and probabilities, rather than feelings.
In practice, this discipline often comes down to a few repeatable questions:
- Are the fundamentals intact (or improving), even if the price is erratic?
- Has the original thesis broken — facts changed, not just sentiment?
- Is selling to reduce regret, or because the evidence supports it?
- With new money, would this investment be the best use of capital?
Rule #6 will never feel natural — and that’s why it matters. When we separate stock-price noise from the underlying business, and short-term comfort from long-term outcomes, we give our best ideas time to compound and we free capital from positions that no longer deserve it. It’s not easy for individuals or professionals, but it’s a discipline we work to follow — consistently and with humility.
