Jason Zweig: When a Giant Gain Causes Pain

[Index Fan]

When a Giant Gain Causes Pain by Jason Zweig (The Wall Street Journal):

If you have a small stake in a company, you own the stock. But if that stake suddenly grows enormous, the stock owns you. Thinking rationally about it then can become all but impossible—even if you have a doctorate in economics.

No matter how closely you analyzed a stock when you bought it, if it has since gone way up, then it is time to start analyzing yourself, says Meir Statman, a professor of behavioral finance at Santa Clara University.

“What many people are afraid of when they have a stock with a big gain,” he says, “is regret.” So you need to figure out which will bother you more: selling the stock and then watching it go up even more, or not selling and then watching it go down.

It's harder to be rational when there's a lot at stake

[DougS]

I think this also applies to company stock. Sometimes you feel guilty selling your company's stock, even though it might be the best thing to do from a diversification perspective.

[Scooter57]

I find it fascinating, too, how many people hold onto a stock with a huge capital gain long after it has become way out of balance with the rest of their assets because selling it would mean paying taxes.

I mean how many if you would quit your job if your salary rose to where you were in a higher tax bracket?

And what makes it even sillier is that long term gains are taxed so much less that the money you earn by the sweat of your brow!

[EnjoyIt]

I have always found buying very easy. Selling is near impossible

[Levett]

First prize in the article goes to Terrance Odean:

As Terrance Odean, a behavioral-finance professor at the University of California, Berkeley, puts it: “Investors should diversify emotionally as well as financially."

Lev

[DougS]

I have always found buying very easy. Selling is near impossible

How absolutely true this is.

[dodecahedron]

I have always found buying very easy. Selling is near impossible

How absolutely true this is.

Without going into undue detail, let's just say that I have been in exactly the position of the widow described in the article. I found selling (most of the position) a great relief. It took several months after my husband's death before I actually had all the paperwork in place to have control of the accounts and to be able to execute the trade. Unsure of myself, I intially held on to a token small position after selling the bulk of it. Although my husband had found fascination in following the vicissitudes of the stock, I did not have any particular expertise or interest in analyzing the fundamentals of the stock in question. Closing out the remainder of the position a few months after that was an even greater relief.

[lazyday]

I find it fascinating, too, how many people hold onto a stock with a huge capital gain long after it has become way out of balance with the rest of their assets because selling it would mean paying taxes.

Around 2009 I had a few stocks of larger portfolio % than I liked, and no longer wanted anyway. I sold enough each year to stay just under the next larger tax bracket.

[Fallible]

First prize in the article goes to Terrance Odean:

As Terrance Odean, a behavioral-finance professor at the University of California, Berkeley, puts it: “Investors should diversify emotionally as well as financially."

Lev

Agree. Also, while Odean may not have meant it this way, I do think the statement reveals how emotions are in everything we do, to one degree or another, and so must be acknowledged, understood, and controlled as best we can.

[nedsaid]

Wow. What a nice problem to have. I have mostly worked in the non-profit sector and have not had these kind of opportunities. Worked at a large regional bank for a couple of years and retained my stock, which I still have. But it is a small part of my net worth.

[Levett]

Hi Fallible,

I am certain Odean knows what he said--e.g., in your words: "how emotions are in everything we do."

Often we can manage those emotions by taking actions incrementally, and thus reduce (or diversify or disperse) the "heat of the moment."

That's how I read Odean, and that's the value of what behavioral finance calls "pre-commitment."

Here's a link to the "Ulysses contract" that you might enjoy.

http://befi.allianzgi.com/en/Topics/Pag ... -Plan.aspx

Lev

[Fallible]

Hi Fallible,

I am certain Odean knows what he said--e.g., in your words: "how emotions are in everything we do."

Often we can manage those emotions by taking actions incrementally, and thus reduce (or diversify or disperse) the "heat of the moment."

That's how I read Odean, and that's the value of what behavioral finance calls "pre-commitment."

Here's a link to the "Ulysses contract" that you might enjoy.

http://befi.allianzgi.com/en/Topics/Pag ... -Plan.aspx
Lev

Hi and Thanks!

This was a very good read, not only the contract (which I was familiar with), but the entire paper by some of the best in behavioral economics, although I of course read from a Bogleheads' point of view - no index funds here. .

And the last part of it was certainly not the least, as I was not aware of the "time machine" mentioned, though its development apparently is not all that new. In fact, I googled and found several articles on it, including a 2011 TED talk from Daniel Goldstein if you might be interested: http://www.ted.com/talks/daniel_goldste ... _self.html

Yes, we can "manage" our emotions with an incremental approach and pre-commitment, i.e., the "contract," where the reflective mind can shine.

Thanks again,
Fallible

[docneil88]

As Terrance Odean, a behavioral-finance professor at the University of California, Berkeley, puts it: “Investors should diversify emotionally as well as financially."

Is Odean making an argument for polygamy?

[Levett]

Conjugal allocation. I hadn't thought of that.

Lev

[docneil88]

Conjugal allocation.

Ha! Or perhaps "love and friendship allocation." Don't direct too much of your emotional energy towards one person. Faithful marriage can be wonderful, but be sure to have some close friends and perhaps one or more beloved children or grandchildren.