StockFetcher Forums · General Discussion · Pain Clouds Your Judgement<< >>Post Follow-up
6,359 posts
msg #47023
Ignore TheRumpledOne
9/18/2006 8:20:51 AM

Pain Clouds Your Judgement Perspectives for the week ending September 17, 2006

Consider the following scenario:

You come to one of my seminars and I invite you to ask me my opinion on the stocks you own. You own six stocks and all of them are losing some money but nothing major. Taking me up on my offer to assess your portfolio, you ask me about each stock and then sit back and listen while I assess the charts of each. My response is not too encouraging, I tell you that all of the stocks you own look like they are more likely to go lower than higher and you should think about selling all of them. What do you do?

If you are like most people you grin and nod, thanking me for my comments. On the inside, you are thinking, "This guy is a total idiot, all of those stocks are highly recommended by that guy I saw on TV. I am not going to sell them all now, that would make me lose money."

The thoughts in your head prove that you are a normal human being.

You may know that the stocks you own are making you uncomfortable, they are not moving the way you expected they would when you bought them. But it hurts to think about selling them at a loss so you want to believe that I am wrong.

Now, what does the person sitting beside you, a person who does not own any of the stocks that you do, what does he think about my comments?

He probably agrees with my assessment. Looking at the patterns on each chart, the indications that the sellers have taken over control of the stocks, he can see why I think these stocks are more likely to go lower than higher. Without the emotional attachment to the money you have invested in these stocks he can see the reasoning for the dismal expectations.

Now, step back from this scenario and look at your real portfolio of stocks. Try really hard to take out the emotion and look at each holding rationally. Are any of your holdings losing you money? Are the Sentiment Stockscores of the stocks you hold below 60? Do you wish you had not bought any of these stocks and find yourself hoping that they go back to what you paid for them so you can get out?

If you answer yes to these questions, you may be holding a bad stock and have continued to hold because you are avoiding the pain of locking in a loss.

One of the hardest things we do as investors is sell our losers. Most of us ignore our losers initially and feel a lot of anxiety as they go lower and lower. Eventually, the pain of watching them lose money is too much to handle and we sell them at a big loss, wishing that we had just sold them when they started to show a problem.

Imagine how much better you could do with your investments if you could just get rid of the big losers in your portfolio. Most investors have them, those stocks that you have owned for a long time and are now showing too big a loss to consider selling them now. If you hang in there, maybe they will turn around.

Why are you holding the dogs? The overall value of your portfolio is not going up because you own them. They are not likely to make a big recovery and make that cash work. Wouldn't it be better to get rid of them and put the money in to something that has the potential to move up?

On a weekly basis, you should go through each stock in your portfolio and ask a simple question. "Is this stock more likely to go up or down?" If the answer is down, sell it. If you really like the story, you can buy it back later when the answer to this same question is "up".

How many of you will actually do this? I would guess less than 10%. Why? Most people are normal and avoid pain and pursue pleasure. So, you can do what a normal person does and ignore this commentary and go eat some chocolate or drink a glass of wine.

But remember, people who think like everyone else don't beat the market.

6,359 posts
msg #47024
Ignore TheRumpledOne
9/18/2006 8:21:18 AM

"But remember, people who think like everyone else don't beat the market."

Here, here!!

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