And now another article on the psychology of investing, from
the New York Times, on why people don't sell their losers.
Here's the URL
nytimes.com
And here is the meat:
--START QUOTE---
Extensive research has shown
that they are more likely to sell Amazon, or any stock, if they are
holding it at a profit than if they're holding it at a loss. Known among
researchers as the "disposition effect," this behavior can cost an
average active investor thousands of dollars a year.
An extensive study of the disposition effect was conducted recently by
Terrance Odean, an assistant professor of finance at the Graduate
School of Management at the University of California at Davis. Odean
tracked the trading histories of 10,000 individual investor accounts
from January 1987 through 1993. He found that instead of cutting
their losses short and letting their profits run -- two widely cited bits
of portfolio advice -- the average investor did just the opposite.
Investors realized only 9.8 percent of the losses they could have
realized, compared with 14.8 percent of their profits.
The reason for that behavior depends as much on psychology as it
does on finance. Investors, it seems, will go to some lengths not to sell
a stock at a loss. After all, as long as they avoid selling a loser, they
can rationalize that it will recover someday, thus vindicating the
original decision to buy. By contrast, once they sell a stock, investors
cannot avoid the fact that they lost money.
---END QUOTE---
The article goes on to suggest that ValueLine is a good, objective
way of sorting these issues out with stocks, since it is not
subject to the "disposition effect".
Anyway, now you know why we're all still holding IFMX :-)
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DC |
