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Swayed by Emotion

by Joanna Tovia

Below is an extract of John’s interview reported in the Money&You section of the Daily Telegraph 30 Mar 04

Investment strategist Professor John Price says there are two ‘diseases’ investors are prone to which makes them hold onto their losers and sell their winners.

What happens when you buy a stock and it drops by 30 per cent? Do you sell or do you hang on hoping that it will come back to its original price? If you usually hang on, then Price says you may be suffering from ‘get-evenitis’

Investors afflicted with get-evenitis don’t sell a losing stock because there’re clinging to the hope it will go back up to at least the price at which they bought it.

“When the price has gone down and they haven’t sold, it’s an unrealised loss,” says Price. “When they sell they’re actually admitting they’ve make a mistake.”

Men are more prone to get-evenitis then women simply because they are more competitive and less willing to admit they messed up. To cure themselves of this disease, Price says investors have to forget about what the stock used to be valued at and think about the best use of the money if they were to sell it. If a stock was bought for $10 and is now valued at $6, for example, investors should ask whether to $6 is better used in an investment with greater potential.

“They have to take the emotions out of it – forget about the fact they paid $10 for it - that’s gone, that’s over,” he says.

The tendency to sell well-performing investments comes down to an affliction Price calls ‘consolidatus profitus’. People think they can’t go wrong selling at a profit but it all depends on what the investor does with that profit as to whether it was a good decision. The best decision may be to leave it where it is. Unfortunately, research shows that investors tend to invest the profits they’ve made from one investment into one that doesn’t perform as well.

A large-scale University of California study confirms that people would have been better to hold their losers and to trade out of winners into stocks that performed les well. The study found people would have been better to sell their losers and keep their winners. Instead, they did the opposite. If people always sold their losers and held onto their winners, their returns would have increased by an average of 5 per cent a year.

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