박재훈투영인
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4 months ago
3 Ways to Avoid the Mistake of Selling Profitable Stocks Too Early (Dec 2, 2022)
SummaryTraders often sell too early and miss out on long-term profits.Three key hints can help avoid panic selling.It’s essential to learn rational trading instead of relying on emotional logic.As the impending recession frightens investors, many traders immediately sell stocks after hearing the cynical outlook of JPMorgan Chairman Jamie Diamond. Although history shows that the market always recovers, investors repeatedly oscillate between rational and panic selling.The S&P 500 index has increased 119-fold since 1969. As Morgan Housel explains in his book The Psychology of Money, "Investors should simply sit back and let their money grow." Despite various major global crises affecting the market, those who held onto the S&P 500 reaped enormous rewards. A famous adage—“Time in the market beats timing the market”—aptly illustrates that market timing is nearly impossible.Time and the power of compounding naturally drive success, so why do people sell too early?As a behavioral economist, I train traders to remain emotionally resilient during economic turmoil. I help them develop the strength to withstand volatility and the discipline to avoid premature selling. In this article, I share three tips that can benefit traders of all sizes.Why Do Investors Sell Too Early?First, let’s examine why traders fall into this trap. Trading is an emotional game rather than an analytical one. Research in behavioral finance and emotional regulation supports this assertion. Traders often incur losses not because they overlook flaws in a company’s financials, but because their emotional rules compel them to sell as soon as a stock’s price falls.Economic downturns, wars, and pandemics may temporarily damage the market, yet the data shows that doing nothing during these periods can still yield profits.1. Reaching Fair Value: Overcoming Emotional BiasHalo Effect:Traders become overly attached to a successful position, delaying the sale even when it is warranted.Loss Aversion:The natural aversion to realizing losses makes traders wait for a rebound in underperforming positions.Solutions:Quantify Qualitative Judgments:Assign measurable values to factors like a company’s competitive moat, management quality, and financial stability. Compare these metrics across your holdings to replace lower-ranked assets.Blank Slate Test:Imagine rebuilding your portfolio from scratch. This exercise helps remove emotional attachments and forces a more objective selection of assets.Maintain Terminal Inputs:Avoid frequently changing the final assumptions (growth, risk, profitability) in your DCF model.Regularly Review Business Characteristics:Instead of selling at the market cycle’s peak, consider liquidating positions when market sentiment is excessively exuberant.Partial Selling:For quality companies, reduce your position gradually rather than liquidating entirely.Set a Fair Value Range:Rather than fixating on a single fair value number, establish an expected outcome range to allow for flexibility.2. Theme Change: Coping with Shifts in Investment RationaleCompanies evolve over time and may experience unexpected events such as mergers, acquisitions, or CEO changes.Investors can become fixated on past decisions, even when the original investment thesis no longer holds.Solutions:Document Preliminary Sell Reasons:Record the risk factors and expectations you had at the time of investment, and review these notes if those factors materialize.Detect Warning Signals:Pay attention to indicators such as management changes or shifts in business segments—especially those that erode the company’s competitive moat.Philip Fisher’s Three-Year Rule:Consider selling if the company fails to meet performance expectations within three years, as a way to prepare for potential inertia.3. Protect Yourself from Habitual BehaviorNobel laureate Richard Thaler discovered that dinner guests tend to ruin their appetite with finger foods. To ensure guests wait for the main dish, he suggested clearing away the snack bowl from the table.Today, trading is easier than ever. Mobile applications make it simple to tap the “sell” button. To avoid panic selling, you must protect yourself from your own habits. Changing your behavior requires both physical and mental improvement.Tip No. 1: Trade Only on a Desktop ComputerJust as you wouldn’t eat when you’re not hungry, don’t sell when it isn’t necessary. The first tip to eliminate impulsive trades is to trade only on your desktop computer. Behavioral experts compare trading to gambling; traders will do anything to avoid losses while chasing high profits. Most people touch their phones around 2,617 times a day, constantly checking the latest stock prices. Even a small piece of market news suggesting chaos can trigger an unconscious sell order.Tip No. 2: Hire an Asset ManagerAre you managing all your assets yourself? My second tip is to delegate at least 80% of your portfolio to an asset manager. Directly controlling every asset exposes you to significant risk. The media may tempt you to sell solid stocks like Alphabet (GOOG), even when market conditions do not justify such a move, especially when volatile assets like cryptocurrencies are involved.Protect yourself by relying on professionals. Unlike self-managed portfolios, asset managers typically work within systems designed to eliminate emotionally driven trades. Keep only up to 20% of your cash under your direct control and delegate the rest to experts.Tip No. 3: Apply Simulation TheoryMy final advice is to expand on the simulation heuristic: the more you simulate a scenario, the more plausible it sounds, and eventually, you start accepting it as reality. Just as a small, clumsy lie can grow and become more elaborate over time until you believe your own fabrication, simulation theory teaches you to manage your expectations in volatile markets. If you can predict price fluctuations, you’re more likely to avoid impulsive selling. In essence, simulation theory is a mindset: “I know this stock will undergo a turbulent journey for the next 10 years, and I’m prepared for it.”Morgan Housel recommends holding value stocks for up to 30 years. During that period, multiple downturns—including recessions (on average every six years), pandemics, wars, and inflationary episodes—will occur. Acknowledging that volatility is 100% inevitable over a long investment career is a crucial step in emotionally preparing for a rollercoaster ride.There’s one volatility predictor that might surprise you. If you hold shares of Meta Platforms (META), be prepared for a rough ride. One study found that companies with strong CEOs can experience more price volatility. With Zuckerberg holding over 54% of the voting rights, this is not a reason to avoid selling META stock. Rather, it means you should apply simulation theory and anticipate volatility.In Conclusion...Removing the human element from trading can help prevent costly mistakes. Protect yourself and prepare mentally for market volatility. The three tips I have provided can help minimize human interference in trading and build emotional resilience. By trading only on your desktop to prevent impulsive selling, hiring an asset manager to avoid emotionally driven trades, and applying simulation theory to brace yourself for challenging market conditions, you can safeguard your investments. As Warren Buffett once said, “My life is the product of compounding.” Like Buffett, you should let your investments compound by holding onto them.
