November 30th, 2009
06:10 AM GMT
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My wife invested a tidy sum more than a decade ago in five Chinese companies – and then forgot about it. When going through some paperwork, she rediscovered her investments and learned they had grown five-fold in value by November, 2007.

Our awareness of the investment, however, weighed on us during the calamitous events of 2008 as we watched, month-after-month, the value of the stock slide until we couldn’t take it anymore – in January this year, with the value just 20 percent up from her original investment, we cashed out.

From my previous reporting on behavioral finance, I knew that in the long run the smarter move would be to keep the cash in the market. But an surprise pregnancy and the unplanned expenses (to counter the unplanned joy) made it a straightforward decision for us. At least, we were getting out while we were ahead.

And then I’ve watched the Chinese stock market roar back to life, with year-to-date gains on the Shanghai index alone reaching 90 percent in August.


What can I say – we’re human. And as humans we have a nagging propensity to sell low and buy high.

According to behavioral economist, our natural “fight or flight” impulses that kept us alive in the jungle often make our investment portfolios dead meat.

A buy and sell of a stock on a single day is a virtual coin toss: investors have a 50.2 percent chance of making money, investment counselor Philippa Huckle once told me. The longer investors hold, however, the chances of profit expand exponentially: there is a 70 percent likelihood of earning a profit holding for 18 months. Hold for five years, odds increase to a 95 percent probability of positive return, she said.

Yet despite this knowledge, our patience for investment is slipping: from 1984 to 2000 the average stock buy was held for two years and seven months; by 2004, the average slid to two years and two months.

According to Dalbar Inc., a financial research company, a $10,000 mutual fund investment in 1985 left to sit without withdrawal would be worth $95,000 in 20 years, despite losses suffered during the 1987 market crash, the 1997-98 Asian currency crisis and the technology implosion of 2000.

One interesting fact from behavioral finance research helps explain why we dropped that forgotten Chinese stock once we became aware of it – loss aversion. Research shows that investors “feel” the loss twice as much as a similar gain: In other words, the experience to lose $1 ,000 twice as intense as the pleasure of a $1000 gain.

Watching the stock drop month-after-month became too much to take, and we – like a lot of other investors – wanted that pain to go away. And it cost us.

Now I’m trying to forget that, too.

soundoff (10 Responses)
  1. Anthony R.

    I would have done the same thing that I do when I gamble for fun at the casinos. As soon I'd have discovered the dorman investments, I would have sold enough of to recapture the initial investments (adjusted to modern day by taking in the rate of inflation), and left the rest of the appreciated value in the market as “play money.” This is money that I can, by definition, afford to lose (since it wouldn’t have been mine had I not made the investment, let alone the fact I had forgotten all about it) and left it invested in Chinese stocks over the long term. Following this strategy assures that over the long term, you can never lose money (it all depends on how you see things though).

    November 30, 2009 at 9:52 pm |
  2. Steven

    I'm a day trader, and have been for years. My philosophy is very different from the investor – I am in and out usually in under 5 minutes. I make a tiny profit, but I do it many many times a day. If I have a stock for 10 minutes, I made a mistake. Whereas investors try to find a series of companies that appeals to them for whatever reason (market position, the books, growth prospects, etc), buy into it and wait weeks, months, or years.

    However we have one thing in common. If you get emotional about your position, it's because you have TOO MUCH MONEY in it. How much money varies from person to person, depending on their tolerance (guts or foolishness!), income, total net worth, etc. However the big key that I have found over the years is that usually when I make a BAD trade, it's because I got greedy and made a BIG trade, biting off more than I could chew and having the market move against me. So what if I lose $50? But I've had positions go sour and literally lost thousands of dollars in just a few minutes. Hard not to be emotional when that happens. Now I trade smaller.

    Keep it simple – tell yourself beforehand what the maximum you're prepared to lose is, and STICK to it. Every stock program or broker understands what a stop loss is. Use it. Don't regret your losses – count yourself lucky because usually you get out before it gets worse. Then start again. The game is PRESERVATION OF CAPITAL. If you can manage not to lose money, you're ahead of most people. If you make money, be happy, and take some profit. The past 10 years have shown us that if you haven't taken a profit in stocks, you have actually LOST money (and that's without counting inflation!). Take profits when you have them, and if it's STILL a good investment, you can always get back in. Just remember – you haven't taken a profit if you go back in with even more money – that's greed.

    Anyway that's my free lesson on how to avoid becoming emotional when trading. Hope it helps.

    November 30, 2009 at 11:29 pm |
  3. John Ca.

    It is still a free market so, let the banks do what they want is they do not have bailout money from the tax payer and no x-mas payday for (GS)_NYSE

    John Ca.

    December 10, 2009 at 11:34 pm |
  4. John Ca.

    Free markets capital is keeping America Great!!!

    December 10, 2009 at 11:37 pm |
  5. Bolomumbreutt

    It is very interestingly written, to the author thanks.

    January 5, 2010 at 2:24 pm |
  6. Khoo Boo Boon

    Sometime you win ....sometime you lose.... What goes up ....goes down and vise-versa. The key is to not get distracted , especially when market goes to a tailspin following a crisis of confidence . History has shown that stock prices do go down as much as 80% and do recover, within two years. As long as you have the staying power, just stay put. And if you have the cash, this is a buying opportunity (rare one) to add to your portfolio. The key to manage your emotion and the history of market crashes and recoveries is what we need to know to 'calm down our nerves.'.

    Even if you have to liquidate out of fear, take a loss or failed to take up the buying opportunity, do not regret. We should not mourn the "big fish that go away". The key is to learn from our mistakes rather than to it shaped bad behavior such as 'chasing the market' to make up for that loss. Just charged our 'bad call' to experience.

    Boo Boo Khoo

    January 31, 2010 at 11:57 am |
  7. suzi

    what is the total cost of illegal immigration to the US.. include hospitals, schools, social programs such as medicaid, prison, police, etc. If we include this cost, perhaps we could have a small impact on the budget and take care of our aged citizens who built this country.

    April 10, 2010 at 6:05 pm |
  8. Tom69

    Hello everyone.Wake-up we are in a "Depression". get over it.No Jobs no money being pumped back into the economy.The financial system is flat with-out people investing.What I suggest is screw the banks & wall street.That is let the government create a new banking system for the people not for speculation & greed that poisoned if you will the integrity of the United States financial market.

    July 3, 2010 at 4:13 am |
  9. icon collection

    Please, keep to thew point.


    September 24, 2012 at 4:02 pm |
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    Also what?

    October 5, 2012 at 6:14 am |

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