Have we not heard these arguments? This stock has been with me for last 12 years. I bought it at Rs.10, I can afford to wait. I am a long term investor, so I’m not bothered by blips. Absolute fallacy! You just can’t fall in love with your stock. Don’t ever look at your portfolio emotionally. Some stories are not working. Some will give you a better entry level. Some have opportunity costs.
WHY NOT TO FALL IN LOVE WITH STOCKS
You will find a lot of investors advising you not to fall in love with stocks. Believe me, as much as it is easy to say, it is extremely difficult to practice. We all build an emotional attachment to the stocks that we hold; and that is why this rule becomes so important. More often than not, falling in love with a stock forces you to live under a fallacy. Let me explain.
Arvind Mills is a classic case in point. It was a true blue stock in the early 1990s. The problems, although, were apparent. Textile manufacturing margins were getting squeezed and the situation worsened as China, Vietnam and Bangladesh emerged as veritable competitors. The stock lost close to 95% of its value by 2000. So much for falling in love with a blue chip!
In India there is a very strong ethnic and regional bias for stocks. A hard core Parsee will never want to sell a Tata Group stock. Investors in Gujarat can be quite touchy about exiting Reliance Industries. I have seen savvy investors from South India who are just unwilling to let go stocks of the Sundaram Group and the TVS Group, purely due to their Southern origin.
WHY DO PEOPLE FALL IN LOVE WITH A STOCK?
I bought it for the long term
Nobody knows the long term. More often than not, it is the unwillingness to admit that the decision was wrong. There is also a fallacy that holding on to a stock for an infinitely long period assures returns. Perish that thought!
It has served me well over the years
Investing is not like a buying a car or a washing machine. The most reliable and pedigreed need not be the most profitable. There is an obvious tendency to oversimplify and believe that the past is a credible indicator of the future.
Nothing seems to be wrong with the stock
This is such a common excuse for holding on to a stock. Get real. You are in the equity market to make money out of the next big idea. You are not a bond-holder looking to scrap a small premium over the index.
“When you fall in love, you uncork emotions and bottle your common sense” – Anon
WHY YOU SHOULD NOT FALL IN LOVE WITH A STOCK OR IDEA?
- When you fall in love with a stock, you effectively ignore your portfolio mix. Assume that you are over-exposed to the FMCG sector. You still do not want to sell Colgate and Unilever because you believe that their products have perennial demand. In the process, you are making your portfolio a proxy for the FMCG index. That is quite a price to pay for your obsession.
- You also miss out more exciting opportunities along the way. Agree that you have been a devotee of L&T for the past 15 years. But logically they should have gone out of your holding with the downturn in the capital cycle. Eventually you may become profitable in L&T. But in the meantime you lost out on an Eicher or Prestige which were multi-baggers. Is it not?
- Ok, you may be right that the stock you are holding is a great bet and it will bounce back. But as an investor you are not obliged to live through the cycles. That is the promoter’s job. To extend the above example of L&T, would it not have made more sense to exit and re-enter at lower levels. Why live through the pain of the stock’s underperformance.
- As an investor, you allocate your limited resources among various stocks. Therefore, when you fall in love with one stock or idea, you let a plethora of exciting opportunities pass you by. In other words, falling in love with a stock has an opportunity cost in terms of missed profits. Is it not more sensible to focus on the multiple opportunities in the market, rather than getting fixated with a single stock or idea?
HOW SUCCESSFUL TRADERS PRACTICE THIS RULE:
In his famous song, “The Gambler”, Don Schlitz, pens a beautiful stanza. “You got to know when to hold, and when to fold them; know when to walk away and when to run”.
These lines best capture the essence of not falling in love with a stock. As the song continues, “Every gambler knows the secret of surviving; knowing what to throw away, and what to keep. And that is the essence of an intelligent trader and investor. Every stock is a winner and a loser. It is the trader’s dispassion that is the difference between winning and losing.
Let me hasten to add that this rule is not the antithesis of conviction. The greatest traders like Paulson, Chanos, Druckenmiller, Paul Tudor Jones and Jim Rogers have made returns on conviction against popular scepticism. As Chanos puts it eloquently, “No trader can always be right. But when you are wrong, the best thing you can do is to stop being wrong”. Admit your mistake, let go your favourite idea and get on with other trades.
TAKEAWAYS FROM THE ‘DON’T FALL IN LOVE’ ARGUMENT…
We tend to associate greater traders with landmark trades. Jesse Livermore with the 1929 crash, Jim Chanos with Enron, John Templeton with Japan, Jim Rogers with commodities, Paul Tudor Jones with Black Monday 1987, Soros with the UK Pound and, of course, John Paulson with sub-prime. Behind each of these trades there were a series of flop trades, unlearning, remodelling that is hidden. The most basic among them being; not falling in love with any idea.
I will conclude with the story of an investor who bought Wipro in 1999 at the peak at 152 times earnings. The stock had made him rich between 1996 and 1999. When Wipro started correcting in 2000 he did not have the heart to exit. He recently called to say that he was exiting. But 14 years of stagnation was a huge price to pay for falling in love with the stock!
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