That successful investing is more a matter of a strong heart than a strong mind is something I have repeated innumerable times on Safal Niveshak.
Of course, succeeding as an investor requires a strong mind – the ability to study and identify the good and great businesses while avoiding the gruesome.
But what you need is a stronger heart so as to keep your emotions at bay and behaviour in check, especially when stocks plunge – or soar.
I met a friend yesterday who has multiplied his money 8x in Symphony Ltd. in less than four years. Prior to that, I met a relative few weeks back who has grown his money in Bajaj Finance 6x in less than 5 years.
Surprisingly, instead of being happy about their stupendous gains in these stocks, these people were suffering from a peculiar fear.
In fact, I must not term their fear as surprising or peculiar because this is the exact emotion I have gone through a few times in my own investing life.
Like when I was sitting on a 5x gain in Page Industries in January 2011 and 7x in KPIT Technologies in October 2013.
More than being happy about my gains, I was stressed holding those stocks as they had grown to form a large chunk of my portfolio.
Jason Zweig, a leading financial writer in the US, recently revealed the cause of my agony when he wrote…
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.
That was seemingly the cause of my fear and that of my friend and relative – our stocks had started to own us.
Meir Statman, a professor of behavioural finance at Santa Clara University, rightly says, “What many people are afraid of when they have a stock with a big gain is regret.”
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.
Zweig suggests a way out of this problem of being afraid of the regret of selling a stock and then watching it go up even more, or not selling and then watching it go down.
To manage both kinds of regret on a highflying stock, consider selling, say, 20% in five equal instalments at regular intervals. That reduces the risk of selling too soon and of holding too long.
I have personally employed a similar strategy for my portfolio for the past two years. Like I accumulate good stocks over a period of time, I sell expensive stocks from my portfolio over a period of time – largely in chunks of 25% in four equal instalments.
Please note here that I would not always sell a stock just because it has risen sharply in price, but sell it because that price is not justified in relation to the business’s intrinsic value.
But the key idea I want to share here is to be a disciplined seller of a stock when you realize it is starting to own you, and your peace of mind.
As Terrance Odean, a behavioural finance professor at the University of California, Berkeley, puts it brilliantly, “Investors should diversify emotionally as well as financially.”
What do you say?
Also Read: When a Giant Gain Causes Pain ~ Jason Zweig
P.S. Given the overwhelming number of requests I have received over the past few months, I am opening admissions for the 2nd batch of my Value Investing Course – The Safal Niveshak Mastermind – on 5th February 2014 (coming Wednesday). If you haven’t done it already, click here to read more about Mastermind.