That successful investing is more a matter of a strong heart than a strong mind is something I have repeated innumerable times on Safal Niveshak.
Of course, succeeding as an investor requires a strong mind – the ability to study and identify the good and great businesses while avoiding the gruesome.
But what you need is a stronger heart so as to keep your emotions at bay and behaviour in check, especially when stocks plunge – or soar.
I met a friend yesterday who has multiplied his money 8x in Symphony Ltd. in less than four years. Prior to that, I met a relative few weeks back who has grown his money in Bajaj Finance 6x in less than 5 years.
Surprisingly, instead of being happy about their stupendous gains in these stocks, these people were suffering from a peculiar fear.
In fact, I must not term their fear as surprising or peculiar because this is the exact emotion I have gone through a few times in my own investing life.
Like when I was sitting on a 5x gain in Page Industries in January 2011 and 7x in KPIT Technologies in October 2013.
More than being happy about my gains, I was stressed holding those stocks as they had grown to form a large chunk of my portfolio.
Jason Zweig, a leading financial writer in the US, recently revealed the cause of my agony when he wrote…
If you have a small stake in a company, you own the stock. But if that stake suddenly grows enormous, the stock owns you.
Thinking rationally about it then can become all but impossible — even if you have a doctorate in economics.
That was seemingly the cause of my fear and that of my friend and relative – our stocks had started to own us.
Meir Statman, a professor of behavioural finance at Santa Clara University, rightly says, “What many people are afraid of when they have a stock with a big gain is regret.”
You need to figure out which will bother you more: selling the stock and then watching it go up even more, or not selling and then watching it go down.
Zweig suggests a way out of this problem of being afraid of the regret of selling a stock and then watching it go up even more, or not selling and then watching it go down.
He suggests…
To manage both kinds of regret on a highflying stock, consider selling, say, 20% in five equal instalments at regular intervals. That reduces the risk of selling too soon and of holding too long.
I have personally employed a similar strategy for my portfolio for the past two years. Like I accumulate good stocks over a period of time, I sell expensive stocks from my portfolio over a period of time – largely in chunks of 25% in four equal instalments.
Please note here that I would not always sell a stock just because it has risen sharply in price, but sell it because that price is not justified in relation to the business’s intrinsic value.
But the key idea I want to share here is to be a disciplined seller of a stock when you realize it is starting to own you, and your peace of mind.
As Terrance Odean, a behavioural finance professor at the University of California, Berkeley, puts it brilliantly, “Investors should diversify emotionally as well as financially.”
What do you say?
Also Read: When a Giant Gain Causes Pain ~ Jason Zweig
P.S. Given the overwhelming number of requests I have received over the past few months, I am opening admissions for the 2nd batch of my Value Investing Course – The Safal Niveshak Mastermind – on 5th February 2014 (coming Wednesday). If you haven’t done it already, click here to read more about Mastermind.
Nice write up again Vishal. Reminds me of the interview of Prof Bakshi, where he tells us to sell a stock to get a good night sleep.
Thanks Ankit!
Some bit of philosophy and detachment from everything is needed to be cultivated with time.
Even the soul detaches from the body after being in it for years.
On a more practical note you point on “does the stock own you” is a reminder of the things that does obsess an investor.
I too have been excited and disappointed at times.
Thanks for bringing in the philosophical angle, Sudhir!
I think this is true for anything. As Brad Pitt’s character said in the wonderful movie Fight Club “Things you own, end up owning you”. There are plenty of people who buy expensive clothes and then don’t wear them because they are very expensive.
As far as stocks are concerned, I feel best thing to do is to forget the price you bought it in. It is most irrelevant whether one bought Manappuram in Rs 10 or Rs 50. What matters is that its current price is Rs 20 and whether it is worth Rs 20 or not. Of course like most best things to do, it is also very tough to do in practice.
Very true, Abhijeet. Anchoring to the original buy price or to an old stock price is dangerous while making a decision today.
A wonderful post, as always. 🙂
The decision when to sell is anyways quite tortuous by itself, and if the stock in question has given stupendous returns, well then, करेला और वह भी नीम चढ़ा !!!!
The strategy I use is to try to make my portfolio “Free”. For example, when Titan ran up quite a bit as also Symphony, I sold only that much quantity that gives me my initial investment back. In a way, the rest of holding becomes Free. The more discerning sometimes add FD rate i.e. 8-9% to initial cost. This way in fact you utilize mental accounting model to your advantage. The brain tricks you into believing the rest of quantity is “FREE”, so you don’t get attached to it. ;). Of course the ideal scenario would be to get your entire portfolio free… 🙂 .
However, if you believe that the price is way above the IV, as you have pointed out, or the management is doing something stupid, It’s best to get out immediately, even at a loss.
Regret Aversion is the main force that paralysis the mind. Either way you are doomed. If you sell and it goes up, you feel low. If you don’t and it goes down, you tend to get anchored to the high point in addition to feeling “being cheated” of your profit. 🙁
The best thing to remember is ” A stock does not know you own it”. One must be attached to the underlying business and not what is being seen on ticker tape.
Easier said than done, unfortunately. 🙁
Happy Investing.
that is why it is called a market of regrets, if you don’t buy you regret and if you don’t sell you regret.
and if you don’t buy in sufficient quantity and it goes way up, you regret more .. 🙂
“A stock does not know you own it” is definitely a great reminder. When we have such thoughts written in our checklists, following them becomes (relatively) easier.
BTW, nice to see you back here, Sanjeev 🙂
Didn’t know where to post this request but i will be really thankful if you will do a review of the brokerages ( especially on the parameters of ease of online trading & grievance redressal)