The late Gerald M. Loeb, who died in 1975, understood the value of flexibility and made a fortune applying this simple distinction.
In his book, The Battle for Investment Survival, he used a specific formula to maximize his profits and minimize his losses on the fickle stock market. Using this formula, it took advantage of the boom of the 50s and 60s and survived the market crash in 1969.
Its principles are still valid in today’s market and also in other areas of life.
This is how the formula worked:
1. Select an action to buy.
2. Make your selection on the basis of a rational investigation of the facts, expert advice, and intuitive judgment.
3. Recognize that despite your extensive action research, your future is still uncertain.
4. After you buy the shares, several things can happen:
a) The price could go down.
b) The price may rise a bit before falling.
c) The price can rise for a long time before falling.
Only one pattern is certain: sooner or later the price will go down.
5. When the price starts to drop, wait for it to drop by at least ten to fifteen percent. When you do, cut your losses. Sell at the chosen percentage level. Forget waiting for the price to go up again. Sell before you get hurt. Loeb’s formula, in essence, is that you must be willing to accept only small losses.
6. As long as a stock goes up, consider it a success, but as soon as it goes below a certain level let it drop like a hot potato.
In your own life, recognize that there are many situations in life that are like the stock market: they fluctuate, sometimes they seem positive, sometimes negative. The best way to deal with these events is to learn to maximize profits and minimize losses. These situations can be related to careers, relationships, projects, practically anything that has a life cycle.
Also, sometimes consistency is a virtue, sometimes it is not. Often you have to decide.
Emerson once said that a foolish consistency is the goblin of little minds. The key word here is “dumb”. Sometimes it is necessary to be consistent in order to move towards a higher level of understanding and achievement, as in, for example, a research endeavor. And sometimes you need to reevaluate a situation to see if it gets you where you really want to go, as in, for example, a career as a chemist.
Success has the ability to craft two illusions. One is the illusion of dominance. The other is the illusion of control. But life works on a different principle … the principle of change and uncertainty. Acknowledge this fact, rather than fight it. We all know stories about people or corporations, who seem to have mastered their particular discipline and who seem to be in full control of their results, then when conditions change they fall apart because they are still operating with those skills that once worked.
Flexibility, then, or adaptation to change is a fundamental principle for success. Dinosaurs weren’t flexible. Humanity has been flexible. Magnificent civilizations have flourished during their era of expansion and flexibility, but when they created inflexible rules of control and changed conditions, they collapsed. So how much more fragile is the average person living in our fast-paced world. As technology accelerates, many skills become obsolete and there is a need for flexibility to adapt to the changes to come.
Change is part of life. Learn to navigate your course in life with the winds of change. What you have invested in the past is not a sure indication of what you will need in the future.
There are mainly two reasons for making a change. One, opportunity has floated into view and you must bravely sixteen. Two, the opportunity has been missed and you need to get away before things get worse.
How do you balance flexibility with consistency? Consistency must be pursued while resources last and there is a predictable chance that things will improve.
Flexibility should be sought when you can progress further by doing something else with the resources you have.
While flexibility and consistency are opposite principles, there is a time for each, and that is why both are legitimate principles of success.
Another interesting duality closely tied to flexibility and consistency is the duality of pessimism and optimism. Although in most cases pessimism is destructive and optimism constructive, there are exceptions.
Healthy pessimism can be constructive and naive optimism can be destructive.
Healthy pessimism is accepting that things can go wrong and preparing to deal with it with solutions. Opening a savings account, for example, is one solution. In effect, you are saying, “I may not always make as much money as I do today,” or you could be saying, “I am preparing money to invest in future opportunities.” Either way, you face the future with a solution to a problem or an opportunity.
Naive optimism, using the same example about saving, is choosing not to save, because you believe that things will always flow smoothly.
Change is inherent in life. It is also something that we insert into our lives. We can choose to change. Again, this is not a simple proposition. Change, in itself, for the sake of excitement, is not always beneficial. Change brought on by boredom or restlessness is often too haphazard to be successful. In the job market, for example, it is a loss of momentum to simply jump from job to job. It is a gain of momentum if the change is intentional, if it is a movement from a lower state to a higher state, a movement towards more opportunities or more profits.
A university professor at the University of Michigan, Dr. E. Louis Mahigel, was once a professional poker player. He said he learned valuable lessons about the flexibility of the game. “An outstanding characteristic of the successful player,” he noted, “is that he knows how and when to get out of the hand and cut his losses. Of course, he knows all the mathematical probabilities by heart, which gives him an advantage over most of the others. People rush, but their main advantage is in the area of excitement. When the odds say they probably won’t win, they don’t argue; they just put their money in the pot and lay down their cards. The chronic loser isn’t emotionally equipped to do that. He is so desperate not to lose his investment that he takes wild risks to protect it. “