Friday, March 5, 2010

Falling In Love with Our Stocks

Why on earth do we make the silly mistake of falling in love with our stocks..or investments?

A few days back, I posted about the 7 Investment Sins and some brief thoughts on the Price versus Value debate.

Over at MusicWhiz's corner, he had also written about the various investment sins too.

Today, I thought I would just write more about one of the problems that most investors (including me) suffer from:

FALLING IN LOVE WITH OUR STOCKS (and sometimes our investments too!)



(Beautiful Image Above by kwerfeldein )

Human beings tend to get emotionally attached to the things that they possess. Certain people have gone on to suggest the reasons why we fall in love and why it even feels so good to be in love.

Apparently, being in love helps to trigger some of the circuits in your brain that gives you pleasure. Dopamine which is the main chemical that is involved produces feelings of euphoria, sleeplessness, and focused attention on the thing that we fall in love with. Also, the feeling of love tends to last for two to three years. INTERESTING FACTS!

Does that explain why most of our stock holdings only last for two to three years? We research them, fall in love with them and them ditch them for something better after a time frame of usually two years!

This is my experience personally. I have been investing for close to 7 years and I can say that I hardly own any of the stocks that I first owned when I started out investing!

There is however one particular stock that remains in my portfolio today. It is Unifood holdings. Back in the good old days of early 2002, people were singing praises about this stock. I did my research and made the mistake of falling in love with it. The price dropped and I was too emotionally attached to let go of it. I had fallen in love with it. 7 years on, the stock price has dropped. I am now stuck with it.

The problem of falling in love with our stocks is that we let the emotional part of us go into overdrive and after spending some cognitive energies rationalising why we should purchase that certain stock, we simply stop our cognitive engines and rev up our emotional engines. We start to grown a certain attachment to the stocks that we have just bought into. Just the way love is blind, we stop seeing the flaws and only start to see all the good points of the business.

And yet most investors know that we should never let our emotions get the better of us. We are supposed to be cold blooded people just trying to squeeze the last penny out of every investment that we make.

And just like any marriage, we only start to see the flaws after it becomes too late. By then, the emotions are gone and we stare in disbelief at the stock sitting in our portfolio which we thought was the best in the world and should have risen up by ten-fold or twenty-fold.

Have you suffered from the same experience?

Or what strategies do you use to remove the emotional part of investing?

8 comments:

  1. For me, I see myself as a business analyst. If the business goes wrong in any way or I do not like how it is being run, I sell. No emotions attached. Even for investments which I owned 3 years+ (Ezra), I don't hesitate to sell when I see evidence of fundamental deterioration.

    Just my 2-cents.

    ReplyDelete
  2. But how do you detach yourself of any emotions to your investments?

    ReplyDelete
  3. See them as business opportunities and money-making opportunities, instead of getting too personal about them. I view all investing in a business-like manner.

    After all, when you go to work, you don't get emotional over the work in front of you on the desk right? That's also there to earn you a regular, steady income.....!

    Cheers,
    Musicwhiz

    ReplyDelete
  4. Well said MW. I never thought of it that way.

    It is sometimes difficult to separate one's emotions from the rational part of investing. I guess I really need to learn from you to learn how to be less emotional in that sense.

    ReplyDelete
  5. If you've made a lot of money and lost a lot of money, you'll grow to become calm and cool about the whole thing.

    Let's hope you don't have to lose a lot to learn how to become zen.

    ReplyDelete
  6. Hi LP,

    I have experienced the lows of 2008 where I have seen my stock portfolio dropped to horrendous levels. My paper losses at that time could easily buy me a new car.

    I am glad that I stuck to my shares and did not sell them as the market subsequently recovered.

    Must still learn zen techniques from you guys.

    ReplyDelete
  7. Learn how to sell .. If you can't do it. Come and drink coffee with me and I will show you how.

    http://createwealth8888.blogspot.com/2010/03/be-far-better-at-selling-than-at-buying.html

    ReplyDelete
  8. Hahha..uncle 8888,

    Okay..I will drink coffee with you if I still face the problem

    ReplyDelete

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