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The Dreaded S Word

Investing has a funny way of distorting our thought process.  We are constantly bombarded by external hurdles which, in turn, trigger internal conflict.  The buy & sell proposition is the one that elicits the most passion - especially selling.  Our seemingly, emotional connection to investments is fascinating.  Some are treated like a first born.  Why do investors respond like this?  After all, investments are just digital numbers on a statement.  Or are they?  Perhaps there is a lot more to selling.   Maybe we can make some sense of this attachment syndrome (or is it fear of abandonment?).

Maturing bull markets, like the decade-long one we’re currently enjoying, have a seductive way of reframing our personal investment policies.  Buy & hold morphs into buy and die. Like a long summer weekend, we think the good times will never end.  Unfortunately, we know this to not be true.  Since 1872, there have been 15 documented Bear Markets – see box below[i].  The good news is the median duration is just 2 years.  The bad news is the average drop is 41%.[ii]  Is there a way to side step some of this financial carnage?  Let’s use our heads.

Emotions in Motion  

Buying an investment - especially a stock - is the beginning of a story.  We are optimistic as the future holds infinite possibilities. We expect a profitable, happy ending.  There’s a mini euphoria as we’ve made a new financial friend.  For those degenerate gamblers out there, we all know the most fun is initially making a sports bet.   A 3-team parlay? Make it 4.  We see the future and its straight cash homie.   Until the kick-off is muffed.

Likewise, we tend to overestimate our investment prowess – especially men.  This overconfidence can lead to a possessiveness.  Whether the stock is working out or not, we’ll cling to it.   This Endowment Effect makes us consider our personal assets more valuable.  Ask any realtor determining a home’s asking price.  My house deserves a premium because, well, I live there.  I should get top dollar for my car because those front seat rips are custom made.   Ditto for stocks.  We know more than Wall Street does, right?

Of course, deciding to actually sell involves making a decision.  Is my timing right?  What if it goes up after I sell?  {Hint: it probably will} And then what will I do with the proceeds? I may have to potentially make two decisions!  We are inviting regret from the past sell & worry about the future buy.  This potential conflict really causes angst among high achievers and perfectionists.    So why bother?  Easier to keep the status quo.  

Justify My Love

Perhaps a painless way to quell this decision paralysis is to lean on a few, faithful heuristics.   We favor Recency Bias especially if the investment has been profitable.  When in doubt, lean on past returns.  Our objectiveness is dismissed:  it has been so good to me!  This love and affection will continue indefinitely.  It can be particularly troublesome to pry inherited stock from a beneficiary.  Dad worked there for 50 years!  Tell that to remaining GE shareholders.  Fort Wayne National Bank faithful were eventually left with just $2 share.  Without question, personal attachment can be costly.  Be devoted to your spouse; not your stocks.

But even if the investment has been a little rat, we can still talk ourselves into keep feeding it.  We tend to look at higher, historical prices to fasten our belief that it will get back there again.  We’ll hunt around for any data crumbs for Confirmation.  Even worse, many get anchored to cost basis – the market doesn’t know (nor care) what you paid for the stock. At this point, I try to spin the economic benefits of tax loss harvesting[iii] – I get a lot of blank stares.   Like a jilted lover, some think they can never revisit the investment again.

Pain Relief

I’ve reviewed many portfolios over time.  Two of the more glaring gaffes are over diversification and lack of diversification.  I’ve read statements that resemble a stamp collection: sometimes a hundred or more positions.   Conversely, some will maintain an individual stock that represents 30%, 40% or more of their holdings – a recipe for disaster.  Both share the commonality of selling resistance.  Perhaps try the overnight test: wake up the next morning and objectively ask yourself if you would buy all your investments at current prices & fundamentals.  If not, time to prune and reallocate.

Whoever said investing wasn’t emotional, bought CD’s.  More accomplished investors have learned to quiet their feelings – they take a more logical, Spock-like approach.  They understand whether an investment goes up or down, it’s not personal.   They also don’t feel embarrassed or worry it’s an intelligence indictment if things go south.   I’ve spent a chunk of my career trying to improve emotional discipline, admitting mistakes, cutting my losses short & risk management.  I’ve accepted it’s a never-ending journey but hopefully getting there one sell at a time.  

Fiscal Fitness is a publication of Houlihan Asset Management, LLC for the benefit of its clients and friends.     Houlihan Asset Management.  Wealth Counseling/Asset Management. Copyright 2019


[i] Defined as at least a 20% decline from high point

[ii] Robert Shiller


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