...with your investments.
In Woody Allen's film Shadows and Fog, Lily Tomlin says that "the love that lasts is unrequited love." Many investors have experienced unrequited love because they fell in love with one of their investments and thus found it difficult to sell it when they should have so done. Someone should point out to them that your investments cannot love you back.
When an investor has fallen in love with an investment, usually because it has been an excellent performer, this causes them to view it through rose-tinted spectacles. So good news becomes brilliant news, indifferent news becomes good news, bad news is ignored and on discussion boards they sometimes metaphorically shoot the messenger!
Investors could learn a thing or two from the fall of the Persian Empire. The Persians used to kill the messenger who brought bad news, so messengers stopped delivering bad news, the rulers thus only heard good news and their refusal to face up to reality eventually meant that the Empire was lost. Bad news should never be ignored.
Investors who fall in love with their investments usually end up holding them well beyond the point where it would have been better for them to have sold.
If you want loyalty, get a dog
The first sign that you've fallen in love with a share is that when you tend to ignore any information that implies that the shares won't do so well in the future. What you should do is incorporate that information into your opinion of the shares; then if the shares no longer meet your criteria for holding them you should consider selling.
Max Gunther, in The Zurich Axioms, gives a prime example of this behaviour. The chief engineer of a manufacturing company had, over the years, acquired a very large shareholding in his employer. Its share price had fallen and the engineer knew what lay behind this fall was that Japanese competitors were producing cheaper products of superior quality.
So what did he do? He continued to hold onto his shares out of loyalty to the company even though his expert knowledge told him that the company would lose most of its market share and so its share price would carry on falling. The engineer remained loyal and he was rewarded for his loyalty with a worthless investment and the loss of his job.
This happens to far too often -- people cling to their investments out of a misguided sense of loyalty and nostalgia. Those who held onto their gilts during the 1970s because they were "as safe as the Bank of England" saw their investments ravaged by inflation.
If you want loyalty, get a dog, not an investment.
A case study
Some people who own shares really only own just one significant holding; shares in their employer from bonuses and/or stock options. For most of these investors these shares represent a nice sum but losing the lot would not change their life. However, for some employees this shareholding is a considerable proportion of their wealth and represents a pretty risky investment strategy. Should their employer get into trouble there's a good chance that they will get hit with the double whammy of losing both their job and their investment.
Unfortunately in a few companies the culture treats an employee who sells their shares as being disloyal, making it a sign of (misguided) machismo to hold most of your wealth in the company. Enron, the poster boy for corporate crime, would only pay into an employee's pension plan if all of the monies were invested into Enron shares AND the employee accepted a prohibition that prevented them from ever selling the stock until they reached age 50. People who didn't do so were seen as "not fitting in" so most Enron employees ended up with pension plan worth nothing. Here's an article about a retired Enron employee who still held about two-thirds of his wealth in Enron stock back in 2001.
Don't hate your shares
Whilst there's nothing necessarily wrong with holding on to an investment that has fallen in price, or even buying some more (provided that there is still a good case for buying the shares), far too many people end up continuing to hold shares that have fallen until the price gets back to what they paid for them (quite often it never will). It's as if they are thinking "I'll teach that share to make a fool out of me." So they sit tight, often for decades, rather than invest the money elsewhere where they could have made a better return.
Someone should point out to them that they don't need to make the money back in the same way that they lost it -- money doesn't keep score. But bear in mind the saying, "never check the price of a stock you've sold." Selling a badly performing investment only to see it rebound shortly afterwards is a real kick in the teeth and is something that many people can't cope with -- so they don't sell.
Diversify – play the field
One way to avoid this problem is to diversify your investments to the extent that one share will not in itself have a dramatic effect upon your portfolio. Spread your money between at least a dozen different companies, preferably in different sectors of the market, as well using unit trusts, investment trusts and other types of investment such as fixed-interest and index-linked bonds, property and cash.
Of course, you should never sell a shareholding just because it has done well -- that would be akin to a football team selling their star player simply because he has become so essential for the team!
More from Tony Luckett:
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