It’s natural for people to get emotionally tangled up in the price that they paid for their investments. It’s how our brains are wired.
That doesn’t mean we should. The stock market doesn’t know—and more importantly—doesn’t care what you paid.
Your adjusted cost base is purely a suitcase of emotional baggage that you bring—or learn not to bring—to your investment decision-making process.
I have seen this investor behaviour booboo show up in one of two different scenarios.
The first is often seen when there has been a very successful investment in a stock. This investor will refuse to sell high because it would generate substantial capital gains taxation.
Unfortunately, I’ve had the experience of actually meeting far more than one ‘Brex Millionaire’ who refused to sell and ended up with nothing.
What this investor is saying, in so many words is, “I can’t bring myself to sell high and pay even a little bit of tax in order to take the remainder out of harm’s way.”
My other nickname for this investor is ‘Capital Gains Pig.’ Why? The opportunity of selling high and paying some capital gains taxes in order to reduce risk is an opportunity which only a greedy pig would turn away from.
Everyone should know that here’s a famous saying on Wall Street: “Bulls make money. Bears make money. Pigs get slaughtered.” Folk sayings become clichés when they are true.
Inevitably the stock will fall, since it is impossible for a stock to go up forever.
At some time, the stock that was priced to perfection will be unable to defy gravity and the guy who wouldn’t pay some tax and sell, will see his stock trade down that much in a day.
Selling high should be the preferred way of reducing your stock weighting.
The other major manifestation of this behaviour is the complete opposite. This investor will tell you that he doesn’t want to sell at a loss.
His subconscious ego is whispering in his ear. “You didn’t make a bad investment. It just hasn’t gone up yet.”
As an investor, you have to tune out your ego and ask yourself this question. Is this investment, in this amount, a desirable component of a well diversified portfolio? If it is not, cut back on it until it is or liquidate it.
As an advisor, I remind clients that if we sell now and realize the capital loss, we can offset an equal amount of realized capital gains. If you really still like the stock, you can buy it back in 31 days.
Do you want to know how many clients, throughout my career, have re-bought that down stock, after they finally sold it? Zip! Zero! Nada!
My message is that it’s natural to get emotionally tangled up in the price that you have paid for your investments, but a successful investor realizes this predilection and unemotionally makes good investment decisions.
