This article originally published in The Northern Daily Leader on 29 October 2011.
Ever wished you had done something sooner rather than later? An example of this occurs to me quite frequently. It invariably involves some form of a get-together or party, where I’m introduced to a group of new people. I don’t know how it happens, but at some point one of my new-found friends starts calling me Jason. I guess Justin and Jason are pretty similar names, so the mistake is understandable. When this happens I might interrupt them and point out their mistake, but sometimes the moment just doesn’t seem right, or out of politeness I’ll let them persist in calling me Jason – I’m fairly easy-going and if they call me Jason, Justin or Jamie, well so be it, it’s not the end of the world. Problems start arising however when my new friend starts introducing me to other people as Jason – soon half the guests think I’m Jason, the other half think I’m Justin and nobody’s sure who the other half is talking about. It’s not quite on the same scale as the Seinfeld episode where a co-worker of Elaine’s thinks her name is Susie and Elaine has to fake Susie’s death in order to clear up the confusion, but it’s close. It definitely would have been a lot easier to do something about the mistaken identity sooner rather than later.
Given my regular message that most investing behaviour is driven by our cognitive and emotional states, it probably wouldn’t surprise you to learn that the same failure to act sooner rather than later is also prevalent in how we manage our investments. Researchers have given it the fancy name of the ‘disposition effect’, but really all it means is that when it comes to share investing we tend to hold on to our losers and sell our winners. It’s not so much the selling of the winners which is a problem (as they say, nobody ever went broke taking a profit), it’s holding on to dud investments for far too long, when they should have been sold immediately when things started to go downhill. Now not every investment which falls in price needs to be sold, sometimes even the best investments fall in price for no particular reason. But when a stock you buy at $5.00 falls to $3.00 and the papers are full of stories about an inept CEO and dodgy deals, ask yourself the question – do I want to be Jason, or do I want to sell this loser and get out while I can?