Obama Should Have Used a Tighter Stop Loss

 Whenever I need help connecting political events with lessons for investors, I turn to my long-time friend and colleague, the incomparable Jim Woods. Here Jim shows investors how Sen. Barack Obama would have been best served by employing a tighter stop loss — i.e., disavowing the Rev. Jeremiah Wright — way before his association with the man did him any real damage. Read on — I think you’ll enjoy this cautionary tale.

By Jim Woods

By now, I suspect that most of you have either seen, or read about, Sen. Barack Obama’s press conference Monday in Wilmington, N.C. In the press conference, the Democratic Party presidential frontrunner firmly denounced his former pastor, the Rev. Jeremiah Wright, saying Wright’s "rants" of the past weekend were "appalling."

"They offend me," Obama said. "They rightly offend all Americans. And they should be denounced. And that’s what I’m doing very clearly and unequivocally here today."

To Obama’s denunciation, I say — what took you so long?

The racism and paranoia spewed forth by Wright over the weekend was nothing new, although it did come in a very concentrated dose that illuminated just how distorted and truly imbecilic his views really are. I mean, this guy has the audacity — to borrow a phrase — to say that the government manufactured the AIDS virus to kill blacks, and that America’s "terrorism" brought on the 9/11 attacks.

Surely, only the most naïve amongst us is capable of believing that Obama didn’t know what kind of man he was dealing with in Wright.

In fact, the world got a glimpse of Wright’s true colors in the post-9/11 Sunday sermon in which he damned the United States from his pulpit. Shouldn’t that have been enough of a reason for Obama to cut his losses and denounce Wright? I certainly think so, but instead, Obama opted for another tactic.

In March, Obama delivered a speech in which he said he disapproved of Wright’s comments, but he did say the pastor still played an important role in his spiritual life. Curiously, rather than take a more forceful attitude toward the ranting of Wright, Obama flipped the discussion into what I believe was a condescending attempt to educate us all on the state of race relations in this country.

Questions of poor judgment aside, why didn’t Obama just come clean and cut his ties to Wright back in March? Or to put it in investment terminology, why didn’t Obama put a much tighter stop loss on the Wright issue and cut his losses before they did any more damage to his campaign?

In retrospect, that is exactly what Obama should have done. But now ask yourself this question, have you ever behaved like Obama with an investment you’ve owned?

I suspect the answer is yes, even for the most vigilant investor. Why? Well, because we all have the natural tendency to try and justify our decisions, even if we know those decisions to be detrimental to our own interest.

The Obama/Wright situation reminds me of the investor who buys XYZ stock at $100, only to see XYZ plunge to $50. The investor knows that it was a bad decision to buy XYZ, but rather than admit the error of his ways and move on, the investor convinces himself that this is a great stock and that it will come back soon.

Of course, when XYZ falls to $25, the investor throws up his hands and finally admits that he was wrong. He sells XYZ and takes a really big loss.

The solution here, for both Obama and the investor, is to employ a much tighter stop loss on every position you have. If you are wrong about something — be it a damaging association with a sick-minded spiritual advisor, or the profit potential of XYZ shares — the best thing to do is cut your losses before you sustain any serious damage.

Life is full of mistakes, miscalculations and missteps, both in terms of the people we associate with, and with the financial decisions we make. But the first step in correcting a bad decision is to admit that you made one in the first place. The second step is to take action and cut your losses before your net worth is irreparably damaged.

If you’ve got a few Rev. Wrights in your portfolio, don’t wait until they derail your campaign before you do something about them.

Jim Woods is freelance financial journalist specializing in the markets and the economy. He welcomes your comments on this piece, and he can be contacted by clicking here.