Welcome to our listener-supported podcast, Money Talk, unpromised absolute financial truths behind financial perceptions with hosts Ed Sutkowski and Chuck LeFebvre. Let’s listen in.

Chuck: Welcome to Money Talk. This is Chuck.

Ed: This is Ed. Today’s topic is the power of knowing when to walk away. In other words, quit and based in part by the book called Quit by Annie Duke who was a professional poker player, by the way.

Chuck: Oh.

Ed: Made millions of dollars doing that. Gave it up to write, I guess.

Chuck: Very nice.

Ed: In any event, Chuck, do you have some observations of when to quit and what to quit?

Chuck: Well, yea. We see this all the time, particularly with deals relating to acquisitions of businesses typically. I’ve actually run across this on either the side of somebody seeking to acquire a business or on the side of hoping to sell a business and people get embroiled in these discussions. They get emotionally involved in anticipation of being able to complete a transaction. Somehow the enthusiasm over reaching the finish line starts to take over the ability to analyze whether it’s a good idea to get there. It seems like quite often I find myself in the position where I’m suggesting to somebody that they need to take a step back and think about if this is really something they want to do. It’s swimming up against the stream, so to speak, having that discussion with people.

Ed: There’s really two aspects of this. There’s the quantitative side, how much money, dollars, and then there’s the qualitative side which gets to the question of abandoning the child, the new business or an idea. We do have an endowment effect that if you have come up with an idea that perhaps maybe is counter to the norm, you’re going to really focus on that and make sure that any information you get that is counter to the norm that you rationalize as being inappropriate. In other words, it’s quitting not only in terms of an investment, a job,  but yourself. When do you quit? You lose your identity.

Chuck: Right. Right.

Ed: Can you handle quitting the loss of your identity? We see this, especially with professionals. Now many of the accounting firms and some of the large law firms, typically the large organizations have a 62 and out, which is incredible to me. Nonetheless, so those individuals lose their identity. That qualitative issue is very troublesome but in terms of when you quit. Often times whether it’s identity or whether it’s money, let’s focus on money for a second. Typically, if you’re going to quit, you typically feel that’s too early.

Chuck: Right.

Ed: Chuck said to Pete, “Look, you got $50 million. How much more do you want?” Pete said, “Just a little more.” So, it’s never ending. You have to think, though, what’s the expected value if you did or you did not quit? Are you going to enhance your position or not? Is it going to deteriorate? People don’t think of the expected value or the absence of value to quit. People tend to hold on to losses and sell profits.

Chuck: Oh, yes. You see that all the time.

Ed: Your experience?

Chuck: Right. You see that frequently when you’re dealing with in the investment world. Right? Where someone will decide…they decided that they’re going to pick some stock that they just read a story about that intrigued them or whatever. It turns out it’s a company that’s not doing very well and they’ll follow that for years and years and years because they’re sure that their initial impression of this being the next big thing must be right. It’s just a matter of when it’s going to finally turn around and pull a profit for them. Right?

Ed: Yes, and I must tell you, I see this and neither of us do, divorce work, which is a good thing, I think.

Chuck: A very good thing.

Ed: In visiting with folks that are having a difficulty with the relationship when he suggested, exit the relationship. “Oh, I’m going to sunk cost. I’ve been married to whomever for X number of years. And we have X, Y, Z together. That sunk cost precludes them from making a decision and they forget if they had left that relationship five years earlier and either not enjoyed another one or just have been free as a bird, they’d be much better off. This question of exiting, whether it’s quantitative or qualitative, but even in the divorce and marriage scenarios. This Dan Kahneman, who is really the top of the bottom that comes with these issues. He’s characterized this as a sure loss aversion. In other words, you’ve got the loss built in, but if you stick with it, it’s going to get better. What?

Chuck: Right. Right. There’s sort of a tax-related analogy here, which is that when you own the stock, until you sell it, you don’t realize for purposes of tax reporting either the gains or the losses on that stock. Right?

Ed: Right.

Chuck: The idea is if you’re holding a stock and it’s trading at a loss, you didn’t really get a loss until after you sell it.

Ed: What you should do is double down.

Chuck: Right.

Ed:  Your average, I see this with the farmers. They have an 80 acres that they paid $5,000 for and they could buy another 80 acres for $15,000.

Chuck: Right.

Ed: “Wait a minute here. What? Is that a good idea?” “Well, yes, the average cost.”

By the way, I’m not denigrating farmers. That happens to be one of the better investments in recorded history, and at least last I looked, they’re not making land anymore. They are making people that tend to eat stuff from off the land.

Chuck: Right.

Ed: In any event, this doubling down is kind of an interesting phenomenon that I see. Some of these investment gurus say, “Wow, it’s near the bottom. You should buy some more.” “Well, you’re in a loss position or whatever, why don’t you sell that, take your loss, and then use the proceeds to invest in something that has a better value going forward?” “How do I know which has–?” Maybe you shouldn’t be an investor because no one knows what’s going to happen.

Chuck: Or maybe you shouldn’t be trying to pick.

Ed: That’s right.

Chuck: We talked about that before that that’s the risk when you try to pick individual securities that you’re likely to get it wrong. You’re more likely to get it wrong than to get it right.

Ed: Yes.

Chuck: I wouldn’t say, not that you shouldn’t be an investor, but that you should maybe just invest in the whole market and take advantage of whatever the market is doing.

Ed: Maybe you should invest in stocks. It really is the issue of what is your tolerance for risk.

Chuck: Right.

Ed:  So, talking to an investment advisor, talking to us, talking to me, am I going to make an investment record? Of course not. What I’m going to do is ask you, “How do you feel about debt?”

Chuck: Right.

Ed: “Debt, what is that?” If someone suggests that, that person shouldn’t be involved in investing, at least Chuck–

Chuck: Equities, you mean.

Ed: Equities, I’m speaking—

Chuck: Right.

Ed: Invest in farms and invest in, I don’t know what else you invest in, but private equity, a bank. Watch out for the new businesses.

Chuck: Right.

Ed: Those guys, 10% make it, 90% fail.

Chuck: Right.

Ed: But the quick buck is not to be attained.

Chuck: Right.

Ed: It doesn’t happen.

Chuck: I agree with you there.

Ed: The sunk cost thing is really interesting to me. Whether it’s a relationship, husband and wife, whether it’s an investment, whether it’s a– I don’t care what it is. I’ve put this much effort and time and money in it, part of my life and I don’t want to give it up.

Chuck: To be clear, when you’re talking about the phrase   “sunk cost” refers to that mental concept, right, of convincing yourself that because you’ve invested a certain amount of either property or time or both in a project that you will somehow lose that if you back away from whatever that investment is. The phrase “sunk cost” is really just the first two-thirds of an important phrase called the sunk cost fallacy, which is as the name implies, it is one of the logical fallacies that people should avoid. If you find yourself thinking that way, if you find yourself thinking, “I’ve already put such and such into this, so I can’t quit now,” you need to stop yourself and say, “Wait a minute, that’s a logical fallacy.” The amount that you’ve already invested in something, it should be completely irrelevant to the decision as to whether you should invest more time or more money in that thing.

Ed: That’s correct. Try to convince anyone of that.

Chuck: Try to convince even yourself of that. You have to be able to stop and take a step back from the decision-making process and say, “Okay, I need to think about this exactly the same way as if I was a new investor, I have not put anything into this yet.” Someone approaches me and they describe the situation as it exists today. Is this something I should invest in, and if the answer is no, then it means, “Okay, time to walk away.”

Ed: It’s a good theory that the new investor looking at the portfolio of an old investor, we’ll call it, and the theory might be that the new investor would change everything, typically isn’t the case. They’ll put a little bit more in some of the stocks that the old investor had, rather than selling everything and starting afresh. It’s a question of loss aversion. I don’t want to look bad if I just give everything away, and it goes north, when to sell.

Chuck: Right.

Ed: The other side of that is folks who rarely, rarely track the performance of the asset that’s been sold after the sale.

Chuck: That is exactly right, yes.

Ed: I find that fascinating.

Chuck: They want to avoid learning that they may have made a bad decision.

Ed: Yes. The world is, the decisions you’re going to make are going to be good, and they’re going to be mad, but the absence of a decision is a bad decision.

Chuck: True.

Ed: Whatever the reason is, you got to make a decision and the absence of a decision, you’ve got to understand is a decision, status quo. People don’t like change, people don’t like loss, so it’s loss aversion. They miscalculate the expected return, if you make a decision, we’re speaking stocks, and you have cash because of it, you’ve had some gains that you’ve taken, tax-wise, to offset gains with losses. That’s another topic, we could spend the rest of the year talking about the need to do that, to harvest your gains and harvest your losses. You’re looking at the tax dog to dictate what the human should be doing.

Chuck: Right.

Ed: I’ve seen that happen, I must admit, in my case. I’m doing this for tax reasons. What do you do? That’s not an economic decision, but I’ve been able to prevail, not with saying, “Those blockhead decisions.”

The only mistake I’ve ever made or a time I’ve ever been wrong is when I thought I was but aside from that, you’re going to make bad decisions. The idea is to make more good decisions than bad ones.

Chuck: Yeah.

Ed: By the way, those take over a long period of time. Those decisions that you make, you’re never going to realize the results immediately, you got to keep track.

Chuck: Right.

Ed: By the way, it’s kind of funny, if someone is monitoring your performance, you tend to be far more conservative.

Chuck: Right.

Ed: You don’t want to be embarrassed, I’m not sure what, who cares.

Chuck: Right.

Ed:  You think someone’s going to think less of you, when in fact, they could give a rat’s whatever. I don’t care what Charlie or Peter does. I’ve got my own issues. And it gets to this question of optimism. Chuck, your view on optimism?

Chuck: Are you talking about in the investment context?

Ed: Just in life in general. Let’s limit it to investment context.

Chuck: So, I think that it’s important to, I guess, have that bias in the sense of recognizing even in times where you might otherwise be inclined to have your mind go a different direction to recognize what the long-term trends are. In most areas of life and investing is a great example of one of these things, which is that for instance, right now, the market is volatile. A lot of people are feeling like, “Oh my gosh, I lost X dollars this year, so far, and they can start having some very negative thoughts about, for instance, the way the market is working. You have to remember that the long-term trends are upward. The easiest way to remember that is if you do just generally have an optimistic outlook. Right? That confidence that things are over the long-term going to turn around and going to move in the correct direction is an important part of being able to keep perspective during times where there’s some turmoil.

Ed: The downside is optimism can create a problem in determining when to walk away.

Chuck: That’s true.

Ed: You get married to the sunk costs, the endowment, this is my idea, this is my relationship, this is my investment, and it’s going to be better. I’m not sure it’s going to be better, but it impairs your ability to make a good decision. There’s a thought that you should have a quitting coach, which I’ve never heard of before but some of the authors and some of the folks are far more skillful than I can ever be and ever thought to be, is you need someone to be able to tell you, that first of all, respects you, maybe even loves you, has your best interests in mind can but can say, “Eddie, it’s time to quit.” That’s not going to happen, but if that quitting coach said, “Okay, let’s do some points. If you don’t get X percent of return on investment by this date, you should quit, or-”

Chuck: That investment,

Ed: -that investment, that’s right. Have quitting coach help you set guidelines or checkpoints, targets. When you hit those, handle it!

Chuck: Right.

Ed: Either keep, buy more, or sell.

Chuck: Right.

Ed: The idea, but I’m not sure you need a quitting coach. You should be able to set those decision points yourself.

Chuck: Well, yes, but I also think that it’s important to distinguish between backing out of an individual investment versus backing out of the enterprise of investing itself.

Ed: Or backing out of a relationship.

Chuck: Yes, there’s a difference. Sticking with the investment concept, as an example, it seems like a lot of times people, they’ll decide that they’ve fallen in love with a certain stock for whatever reason. Usually, because they like the company, maybe they’re a fan of the company’s products, and so they just say, “Well, if I liked the products, that must be a great stock to own, too.” They buy the stock, it turns out, the stock doesn’t perform that well. Here they are losing money, and they become despondent about that. Then one of two things becomes a habitual reaction to that. The first is to double down and to refuse to recognize that was an investment that you probably shouldn’t get out of.

The second, it’s really kind of a version of the first, which is not being able to accept that maybe that investment was a mistake, is to say, “Well, the market is bad. I need to just get out of the entire market.” Wait a minute, middle ground here is time to back out of that investment, but maybe just still stay committed to the market and find a different place to put the proceeds when you back out of that investment.

Ed: We’ll get in on our next podcast, just talking about that very issue, but addressing it now, it’s when to quit. You’ve got to establish checkpoints where if this happens, at this point, this is what I’ll do, or this is what I will not do.

Chuck: Right.

Ed: And pull the trigger.

Chuck: Right.

Ed: People don’t want to absorb either an intellectual loss of a position expressed, or an investment. Then it gets to the big problem of your other child. This as an entrepreneur, you spent more than a few months, more than a few years creating this business.

Chuck: Right.

Ed: And when do you sell it? I think the best example, is this identity because you’re identified with the business.

Chuck: Right.

Ed: I think of Sears and Roebuck which is a quintessential example of identity crisis. Sears sold Allstate Insurance which turned out to be a magnificent investment. They use the proceeds to shore up their locations, of course, and they saw Target coming along, TJ Maxx, Walmart, and whatever. Nonetheless, they’re fighting these other organizations and selling off the good assets. They sold Allstate. They sold off Coldwell Banker. I think, and several other organ– Discover Card, I think.

Chuck: Right.

Ed:  All these magnificent businesses, you’re making all kinds of money. They sold them off and used the proceeds to continue with their identity.

Chuck: Right.

Ed:  Sears, ugh.

Chuck: How did that work out?

Ed: Not too well. Sears, I think, took bankruptcy. I don’t know what’s going on with them but they sure not as profitable was Discover, Coldwell Banker, or for that matter, Allstate.

Chuck: Right.

Ed: In any event, that’s an example of identity crisis. That if I sell now, people are going to look to me as a blockhead. Why do you care what other people are going to say? That’s the quintessential example of making a bad decision based upon a psychological perception of how you’re viewed in a community.

Chuck: Right.

Ed: That’s difficult. Most people tend to think that identity is worth more than anything else.

Chuck: You hear people do this in business all the time where you’ll, “Okay, so why are you taking that direction?” “Well, that’s what we stand for.” That’s not actually an answer or, “This is what we do.” That’s a non-answer.

Ed: “Why didn’t you sell that off?” “Because why would we sell it off?”

Chuck: Right. “Because that’s who we are.”

Ed: Right.

Chuck: These are all nonresponses to the question being asked.

Ed: The big issue here, Chuck, the lesson, I’m told the takeaway, I call it a lesson.

Chuck: Right.

Ed: I’m old fashioned, is that when to quit is a big issue, but if you focus on the expectations of the alternative, where would it be? You track those, investments, that you’ve sold, it’s pretty refreshing to think, “Well, maybe just buying and holding isn’t such a bad idea assuming the stock is a good one.”

Chuck: Right.

Ed: Think of Sears and Roebuck, the catalogs, and all of a sudden, Target, and all of a sudden, Walmart, and all of a sudden TJ Maxx. You have the Sears Tower in Chica– How many times has that been sold?

Chuck: Oh, my goodness. I don’t even know what its current name is. It was the Willis Tower for a while. I’m not even sure if that’s still the correct name. It’s gone back and forth a lot of times.

Ed: It’s like changing your underwear, next time you looked, it’s a new owner.

Chuck: Right.

Ed: Anyway, that’s it for today. I’ve enjoyed this excursion into the psychological aspects of when to quit and when to walk away, when to stay around. Remember, get rid of your losses and keep your profits. That’s not going to happen but nonetheless–

Chuck: That’s the idea.

Ed: Yes, that’s the idea. You’re the expert and you got to live with your own issues. Thanks for your time, Chuck.

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