Over the next 12 months, it's possible that over a million US residential mortgage-holders are going to walk away from their homes. They're going to walk away from all the payments they have made, from the work they've put into making the house look nice, walk away from everything except (probably) their belongings inside. Why would they do that?
They'll do it because they owe more on the mortgage than the house is worth. They bought at the top of the market, they bought with mortgage rates that have climbed as their incomes have fallen, or simply because they have to move for work or other reasons, and can't sell the house.
Thinking about this today brought to mind bad trades. There is a temptation that I've had in my trading career to walk away from a bad trade. Just let it rip. Walk way from it, push it out of my view, put as much distance between me and the bad decision. I call this Possum trading, and you can read about it in my ebook The Woodchuck and the Possum by clicking here.
I think we are tempted to walk away from a bad trade for understandable reasons (like I've described above). Just because the reasons for walking away from a home underwater, I can see why a trader would prefer to close his eyes to the ugliness of a poor trading decision.
This type of behavior has deep, long term negative consequences. When faced with an ugly trade, it is much better to do any or all of the following:
1. Talk to a trading friend and frankly disclose the entire situation;
2. Calculate how close you are to a margin call;
3. As a person who trades for a living what they would do;
4. Immediately admit that you might need to take the loss, but don't necessarily immediately close the trade;
5. Following up on #4, don't panic;
6. Write down or record your thoughts on a regular (daily or hourly) basis about the experience;
7. Stay present in the situation and face it head-on.
The result may be that you close the trade and take a loss. But you do it with integrity, and you learn from the experience. But there is a chance that if you follow some of these steps, you get yourself out of a tight situation -- with help -- and you turn what could otherwise be an unecessary loss (due to panic) into a positive.
