Am I Fooling Myself?
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Having just sold shares I bought nearly ten years ago, what can I learn by questioning the psychology involved?
Should I have sold sooner?
With hindsight, yes. I made a good return on the investment, but I'd have made a lot more if I'd held for only nine years.
Why did I keep them for so long?
I guess the underlying question is, did I hold because of inertia -- just plain laziness? As I look over my file on this, I have to say the answer is no. I reviewed the prospects for the company regularly, and came to the view that it was still worth owning.
Was my analysis correct?
At first glance, yes; I made a profit and considerably outperformed the market. Looking at it more deeply, can I be sure that this was anything more than luck? Outperforming the market doesn't prove I was right, any more than winning the lottery proves that one is skilled at picking numbers. Psychologists refer to this as outcome bias -- judging the quality of the decision based on the results.
My guess is that there was another factor at play here: the endowment effect. We tend to value something we own more highly than something we don't, even if those items are identical. When I reviewed my shareholding, instead of considering whether to sell my shares at the market price, I should have been asking if I'd be willing to buy more at that price. If the answer to that was 'no', then it might be time to sell.
Was I honest with myself?
Not totally. The shares hit a peak last summer as the company was a prime candidate for takeover by private equity. As the months progressed, it became clear that the credit crunch was curtailing leveraged takeovers; the warning signs were also out for some areas of the economy, at least on the balance of probabilities.
It was still a strong business, and that's why I held on, but the factors supporting its share price were gradually slipping away, and I chose to ignore this. The story had changed. Cognitive dissonance: the conflict in our minds between opposing beliefs. Charlie Munger, Warren Buffett's business partner, cites the tendency to avoid or promptly resolve cognitive dissonance as a major cause of misjudgments.
I believe that understanding the games our minds play can make us better investors.
"Our brains are made for fitness not for truth", Steven Pinker.
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