Saul et al. I wanted to chime in here. I think this Question is a really good one and has brought out what I would call investing logical fallacies. I think these fallacies do more to impact your returns than if you are good or bad at reading a balance sheet. Your mindset, biases or whatever you want to call it are your most important skill in investing.
Let’s take them one by one.
-
The, “I’m going to hang on until I have a profit” fallacy. There are so many things wrong with this one. First off, your money should be invested in what you think has the best chance of earning you money. Second, the “price” isn’t as important as the business opportunity.
-
The , “This is a multi-bagger for me and I don’t want to sell it” Or the, "I love this stock ". You should care about what your overall portfolio’s return not if a particular stock is a multibagger or not. Be dispassionate, when the opportunity changes then it is time to move on. Your thinking should almost never be, well this stock has earned me 1000% so I’m going to hold it. Your thinking should be, what is this stock going to earn me in the future.
-
The, " I haven’t lost money so I’ll just keep it " . Your decision to buy or sell should be based on what the company is doing , rarely on what the stock is doing.
-
The, “it is only a small part of my portfolio so I’ll just keep it”. No, you should be ruthless, every dollar counts. The difference between 10% return and 12% return over 30 years is 17x vs 29X. Compound interest is our friend. Use it.
-
The, " I’m playing with the house’s money " All the money is your money, invest in what you think is going to be bigger and more profitable in the future. As soon as a dollar is gained consider it yours.
The Fool preaches a buy and hold philosophy which is great when you are trying to get thousands and thousands of people to be individual stock investors. Most people out there are just going to buy what the Fool says. If TMF can get them to just hold their stocks then they are going to most likely beat the S&P by a couple of percentage points. Over 30 years they are going to have way more money than if they did index investing. We are doing something different, We are going for 20% + gains (hopefully more) which is going to mean 250x + gains over 30 years instead of the 17-30x gains. To do that you are going that we need to constantly guard against the logical fallacies. See Tinker’s , Saul’s and some of the other posts for good thought processes about if you should sell, hold, or buy more.
best,
E