Short-Term Thoughts for the Long-Term

Friday, July 11, 2008

Why do long-term investors become married to their positions? What is it about finding yourself in a losing position that makes you want to recover the loss from that stock? Why do we become paralyzed and not sell when we should? There are no reasons; we become this way because of emotion and emotion causes irrationality. Emotions are feelings, they're mental states brought about unconsciously causing physiological reactions. The emotion that comes with losing is so intense that it stems our ability to be rational. So, what should you do?

Exit your position! The market is open tomorrow, and the day after that, and the day after that; you can get back in if you change your mind. If you sell and change your mind, buy it back. The simple act of exiting your position allows you to think clearly. The mental weight of all the negative emotion will be lifted; you will be able to think. And, if an hour later, you change your mind, buy it back. What the hell is the difference? So what if you incur transaction costs? As a trader, you can't worry about the transaction costs, you have to worry about being sufficiently right on the trade and the costs will be insignificant. And, if your investors have a problem with you changing your mind, they better put their wealth in money markets because you cannot afford to be inflexible in the stock market.

Our emotional response to losing positions is overwhelming. The simple act of exiting the position gives you clarity of thought. And, often, when you're in a losing position that is becoming overwhelming, you're simply wrong. The market is telling you you're wrong by going against you. There will be times where you're right and the market is wrong. But, the price of the stock is the ultimate indicator of your ability to analyze correctly the difference between intrinsic value and stock price. Sometimes, you must just heed the action of the stock price as an indicator of your mistake.

So, you know what you do? You exit the position, you bang the fucking desk, you break the fucking monitor, you take the fucking keyboard, you smash it to little fucking pieces, you scream fuck you you fucking stock, fuck you, fuck you, fuck you... And then, you pick up the pieces, you get a new keyboard and you move on. You were wrong, isn't the first time, won't be the last. can think.


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