A message from Jay
This is the first post in a new column being featured by The Deep Dive – If you notice, the listed author is not the same old same old. The column, entitled Mental Hurdles, will focus on the psychology behind the trade. The intent is for it to present common psychological fallacies that persist in the investment community, through lighthearted humour.
Mental Hurdles will be presented by Rhum, an experienced investor in the small cap sector. Some of you may know him through his Twitter handle, @rhum01. For those that don’t, he is regarded as a valuable asset within the Twitter community whom has experience in both the technical and fundamental aspects of the market. As a frame of reference, he describes his account as “Charts w/ sarcasm dialed up to 100%”.
Mental Hurdles: Fluffy the Bag Freer
Today we are going to tap into the mental side of your investment and trading strategies. While this idea is not new, I will be submerging you into a story that that has been crafted to help you take on a fresh perspective on bag holding.
Yes, that is right – Bag holding.
I often hear and know people that refuse to take a loss and as such begin their journey as a bag holder. There is a cure to this disease however. Before we go any further, let’s take a moment to clarify what a bag holder is. According to Investopedia it is “An informal term used to describe an investor who holds a position in a security which decreases in value until it is worthless. In most cases, the bag holder will hold the position for an extended period of time in which most of the investment is lost.”
There are many reasons why someone might be holding a bag, but we are not here today to talk about how that happens. We are going to talk about the cure to this disease. Now imagine this.. you are at home hunkered down at your computer, combing over your investments and looking for any trades that might present themselves. Your cat Fluffy jumps up on the table and you begin to pat her and she purrs with content. (Yes, you have a cat named Fluffy, if that doesn’t bode well replace that with a dog, child, crazy uncle, computer hacker…whatever.)
As you are patting Fluffy, you notice a stock you have been eyeing has some key indicators you were looking for to occur and this was the sign you were waiting on to take a position. Sadly, your funds are tied up in other companies at the moment; some of which are bags that seemingly get heavier each and every day.
While you sitting there pondering your portfolio holdings suddenly your stomach starts to rumble and turn. You realize quickly that maybe those tacos you neglected to refrigerate and left on the counter all night were probably not a good idea to eat for breakfast this morning. You rush to the throne and luckily you make it just in time.
Several moments later you leave the throne and are fully relieved. You make your way back to your computer and realize that fluffy is laying on the keyboard and kneading it. Frantically you swat her off your keyboard and assess what has been done. You quickly realize that everything has been sold. Your entire account is cash. You look at your cat and scratch your head in disbelief. Fluffy being the smart critter she is evacuates the room while you frantically assess the ‘damage’.
What do you do now? Do you buy it all back? All the shares you once had, buy the exact same ones back right away? Did you catch yourself saying No to some of those you would not buy back. Eureka! You just did it.
Of course, you have selected some good shares to invest in and I would fully suspect that you would be bidding for them as soon as possible. However those ones that you say no to. Let’s face it. Fluffy just set you free of your bags. The remainder of that cash can now be used to purchase those other stocks you were eying. Looks like fluffy won’t lose one of her lives today after all.
The Moral of the story
If a stock in your account is suddenly sold and you wouldn’t rush to buy it back, then why are you still holding it now? Think about this the next time you feel you are holding a bag. Imagine Fluffy did this to you. If you can honestly say you would not buy it back, then perhaps you really should let it go. Move the remainder of the funds into something else you deem a better investment.