Sell when it makes sense
How the typical investor procrastinates when it comes to selling, writes Michael Pireu
William O’Neil on selling losers: Some people say, "I can’t sell that stock because I’d be taking a loss." But if the stock is below the price you paid for it, selling doesn’t give you the loss; you already have it. If you aren’t willing to cut your losses short, then you probably should not be buying stocks.
Would you drive your car without brakes?
Fred C Kelly, the author of Why You Win or Lose, provides the best example I know of how the typical investor procrastinates when it comes to making a selling decision.
A man has rigged up a turkey trap with a trail of corn leading into a big box with a hinged door. The man holds a long piece of twine, connected to the door that he can use to pull the door shut once enough turkeys have wandered into the box.
However, once he shuts the door, he can’t open it again without going back to the box, which would scare away any turkeys lurking on the outside.
One day, he had a dozen turkeys in his box. Then one walked out, leaving 11.
"I should have pulled the string when there were 12 inside," he thought, "but maybe if I wait, he will walk back in."
While he was waiting for his 12th turkey to return, two more turkeys walked out.
"I should have been satisfied with the 11," he thought. "If just one of them walks back, I will pull the string."
While he was waiting, three more turkeys walked out. Eventually, he was left empty-handed. His problem was that he couldn’t give up the idea that some of the original turkeys would return.
This is the attitude of the typical investor who can’t bring himself to sell at a loss. He keeps expecting the stock to recover.