Faced with the prospect of selling a stock, investors become emotionally affected by the price at which they purchased the stock.
- So, they avoid selling it as a way to avoid the regret of having made a bad investment, as well as the embarrassment of reporting a loss. We all hate to be wrong, don’t we?
What investors should really ask themselves when contemplating selling a stock is:
“What are the consequences of repeating the same purchase if this security were already liquidated and would I invest in it again?”
- If the answer is “no,” it’s time to sell; otherwise, the result is regret of buying a losing stock and the regret of not selling when it became clear that a poor investment decision was made – and a vicious cycle ensues where avoiding regret leads to more regret.
- Regret theory can also hold true for investors when they discover that a stock they had only considered buying has increased in value.
- Oddly enough, many people feel much less embarrassed about losing money on a popular stock that half the world owns than about losing money on an unknown or unpopular stock.
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