It is very easy to say that if you are going to have a stock portfolio, if you cannot stand either financially or emotionally to have it be down 50 percent at some point, you should not be in the stock market.
Mostly retail investors buy high and sell low repeatedly why?
Greed, embarrassment and shame are often in the driver’s seat, no matter how much we would like to think otherwise.
Further we suffer from the anti-selling bias. Why? You can be a good buyer of securities or a good seller, but usually people are not both.
Then the moot question is how to deal with the behavior problem of attachment to loss making stock portfolio investments?
A friend of mine was allotted last year a substantial quantity of shares under the employees’ stock option scheme by his company. He called on me three months back and conveyed that the prices of the scrip have reduced by more than 40percent of its original value and asked me what do to? I simply conveyed to him that he should sell and quit. Today once again he called me and informed that the value of the scrip has reduced further by another 30 percent and asked what he should do? I repeated the earlier answer and added that your problem is one of human psychology.
It is there very much in the human psychology to sell the winners too early and ride the losers straight into the ground. This self-destructive pattern even has a name. It is called the “disposition effect.” Stressed individual investors who feel panicked and powerless as their portfolios shrink.
The disposition effect is real. However, the professional investors are less prone to it. One reason is because such investors are more able to confront bad news and admit error. But the madding crowd seems to lack this armor.
According to Prof. Ervolini “As long as the loss is hanging in the portfolio it has a chance of coming back,” “But once you sell a position, that position is a loser forever and a little bit of you is a loser forever. It has also been found that the same part of the brain that reacts with horror to death and disease is the one that’s affected by financial losses.
Therefore selling is often the most critical skill to survive in the stock market either to earn profit or to reduce loss or to keep the principal in tact to shift to alternative investments.
The art of selling is a predominate factor in deciding the success of one’s investment portfolios.