Stock Market Meltdown to Correction Territory Requires a Reevaluation of Your Stock Thesis

In business and investing as well as politics, each decision could be a trap.

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One of the tragedies of the human condition is that we use our big brains not to make rational decisions but rather to rationalize the decisions we’ve already made. We stand by losing stock positions that deepen portfolio losses by the day or we stick around too long in dead-end jobs. We stay in unhappy marriages even after friends have counseled us to leave. We stand by candidates even after they violate our principles.

Disastrous Political Decisions

Some of the worst leadership decisions of our time can be traced to escalation of commitment. Many people lost their lives because American presidents pursued a futile war in Vietnam and continued searching for weapons of mass destruction that weren’t in Iraq.

As George Ball warned in a 1965 letter to President Lyndon Johnson: “Once we suffer large casualties, we will have started a well-nigh irreversible process. Our involvement will be so great that we cannot — without national humiliation — stop short of achieving our complete objectives. Of the two possibilities I think humiliation will be more likely.”

Instead of taking credit for getting the Covid-19 vaccine quickly to the market and encouraging Americans to protect themselves by getting shots into their arms, President Trump doubled down on unproven methods. Over a million Americans and additional millions world-wide lost their lives due to escalation of commitment to a losing course of action.

Notable Errant Business Decisions

It happens in business, too: Blockbuster went bust because instead of buying Netflix, leaders escalated their commitment to renting physical videos. Kodak made the same mistake by doubling down on selling film instead of pivoting to digital cameras.

Escalation of commitment helps to explain why leaders are often so reluctant to loosen their grip on power. Losing a high-status position can make them feel they’re losing their place in the world. It leaves them with bruised egos and wounded pride. Remember January 6th?

Of course, we can’t know for sure which decisions will turn out to be good. But decades of research led by the organizational psychologist Barry Staw have identified a few conditions that make people especially likely to persist on ill-fated paths. Escalation is likely when people are

· directly responsible for and publicly attached to a decision,

· when it has been a long journey and the end is in sight, and

· when they have reasons to be confident that they can succeed.

It’s striking that Mr. Biden’s situation checked all those boxes. He announced his re-election bid to the world in April 2023. He poured 14 months of energy into his campaign and had only four more months to go till the election. And he’s beaten the odds before: Many voters told pollsters he was too old before the 2020 election, yet he persisted in that decision to run and against all odds, he won.

So what should Biden have done to navigate this enormously consequential decision? So far, we know that he gathered his family and top aides. They all encouraged him to stay in the race. That’s a natural enough impulse, but it doesn’t necessarily help, since the people closest to a leader are precisely the ones who are most susceptible to confirmation bias. They’re too personally invested in his success and too likely to dismiss warning signs.

What Mr. Biden needed was not a support network but a challenge network — people who had the will to put the country’s interests ahead of his and the skill to coldly assess his chances. That’s a task for people who are not affiliated with the campaign in any way; people whose judgment has proved to be impeccable and, most of all, impartial; and people who are not worried about the possible cost to their careers. (Ideal candidates for this role might be professional forecaster, since forecasters — unlike pollsters, who tell us what voters think today — excel at anticipating how views are likely to change.)

Insiders worried that pressuring Mr. Biden to back out would backfire. That was a valid concern. Pressure can make people defensive. A more promising approach might start with praising his flexibility, which research shows can make people more willing to rethink bad decisions. This is precisely what started to move the needle.

Second, they needed to ask what he sees as the pros and cons of staying in the race. The best way to open a stubborn mind isn’t to argue; it’s to listen. When people feel heard, they become less defensive and more reflective. Third, they needed to ask him what would shift his thinking.

“President Biden, I admire your ability to build bridges across the aisle. That shows a willingness to have tough conversations, and you certainly have a tough choice in front of you. What advice would you give to others facing this dilemma? You obviously have a long list of reasons to stay in the race. What would be your top three reasons to walk away? What information would convince you that it would be best not to run?”

When I’ve had discussions like this with investors in the financial markets, my biggest struggle has been getting them to acknowledge that failure is a real possibility. They’ve asked me: What if I let go of a position and wish I hadn’t? Along with the regret of closing out a stock position, we also need to weigh the regret of staying in.

From Biden’s Perspective

For Mr. Biden, that might have meant asking him to imagine that it’s January 2025 and he lost the election in a landslide: President Trump is announcing mass deportations, expanding executive power and working to repeal the 22nd Amendment so he can serve a third term.

This exercise might have helped Mr. Biden see for himself how losing could rewrite his legacy. At that point, he might have gone down in history as a man who, like Blockbuster, couldn’t see his own decline until it was too late.

It now appears that several dedicated groups — people who deserved Mr. Biden’s trust but aren’t members of his team or his family — were able to help him think these questions through. He had the humility and integrity to take them seriously, no matter how uncomfortable it might have been. In a recent rally, he told the crowd, “I know how to tell the truth!” The more vital question was whether he knew how to hear the truth. It now appears that he did.

Refusing to quit is not always a heroic act of resilience. It’s often stubborn rigidity. President Biden’s legacy was not only about stepping up to lead. It will long be remembered it was also about having the courage to step aside and put country before himself.

Your Takeaway

Escalation of commitment to a losing course of action had the nation in knots for weeks as the president struggled with changing his decision to pursue a second term.

Investors would be wise to take a page from his brave and noteworthy decision. When applied to the mechanics of investing in the financial world, changing course on a losing position can preserve invaluable capital for the investor.

Especially in view of the market’s current meltdown into correction territory, it is vitally important for the investor to re-evaluate her original thesis for investing in losing stocks to determine if the thesis is still valid. If not, it may require a decision to let go of a losing position to preserve capital.

Saving capital in this fashion will always allow the possibility of re-deploying the capital for better prospects of future capital gains in other promising investments as well as increasing annual dividend income.

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the author

George Schneider

Founder and publisher

Retirement: One Dividend At A Time

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Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.

Disclosure: I am long all RODAT Portfolio names. The Portfolio continues to build dividend income with reliable, dependable equities which have long histories of increasing the dividend.

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