Selected excerpts from the Knowledgebase -7

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Selected excerpts from the Knowledgebase -7

I’ve decided to do a daily small excerpt from the Knowledgebase as sort of a thought for the day. In many cases they will have extra thoughts of mine, or small updates. I hope you’ll find them interesting.

Saul

Here’s the seventh:

There’s no such thing as “I was so far down I couldn’t sell”. The stock price has no memory of the price you bought it at. It’s at the price it’s at. That’s the reality of now. The question about any stock is: “What decision should I make about it now, at its current price and its current prospects?” and definitely not: “What price did I pay for it?” (unless you are planning for tax losses or gains). Price anchoring is a big mistake.

Forget the price you bought something at. It’s at the price it’s at now. If you think you should sell it, say to yourself “I’m fed up with this stock and I no longer like its prospects. Where else can I put the same money where it will do better?” That takes a lot of the emotion out of the decision.

In making a decision to sell, it doesn’t matter now what price you bought it at. What matters is what you think it will do from here! If you suspect that it may be down for several years, or even down for good, don’t focus on what you paid for it. (You can’t make it go back in time to where you bought it.) I’d suggest you put the money into something better.

Saul

For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column
on the right side of every page on this board

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Price anchoring is a big mistake.

OK, I’ll admit it. I’m guilty of making this investment mistake. And while I’m fully conscious of it, and I know it’s a mistake, it’s still very difficult to get past this emotional barrier.

It might be of benefit to others to learn what I am doing to ameliorate this situation, so here goes.

Nothing earth shattering, but the first thing to remind yourself is that once you’ve determined that you are holding a stock in order to avoid the pain of taking the loss (and admitting to yourself that you’ve made a mistake) there is no edict forcing you to sell it all at once. That may sound like you’re simply postponing the inevitable because, in fact, you are. But for some reason it’s easier to take a loss as few smaller losses than one great big one.

Face it, you are not dealing with a rational decision making process to begin with. The situation is that you are in a relationship that is detrimental to your financial well-being. Yes, selling increments will most likely cost you more than selling all at once. The stock may continue a downward trend. For sure you will have more transaction overhead. The point is it’s impossible to ignore your emotions. Selling over time, allows you to continue to hope for that big turn around while redeploying at least some of money tied up in your sweetheart stock.

The next thing to remind yourself of is that you can always buy it back later if that big turn around actually occurs. As a general rule, stocks always rise more slowly than they fall; OK, I’ll probably get slammed for that, there are myriad examples that demonstrate the opposite. But I said “general rule,” not a fundamental law of the universe. We’re not talking about gravity. Investing is not science (even if you’re an 100% technical investor). The behavior of any given stock remains unpredictable. At best we are dealing with a range of probabilities based on uncertain correlations, unstated assumptions, indeterminate variables, unpredictable future circumstances and irrational emotions. It’s a wonder that anyone makes enough correct decisions often enough to consistently make money in the stock market.

So if it makes you feel better, continue to track the stock, or even keep enough in your portfolio to force yourself to continue to pay attention to it. The cost (other than the material loss) will be levied against your most valuable asset - your time. Eventually you will be rewarded for efforts, or you will finally come to the conclusion that continued cost is too high.

I hope that helps if you struggle with this problem as I do.

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