The Case of mistaken identity
“We are not so sensible of the greatest health as of the least sickness”—Ben Franklin (Read profit for health and loss for sickness)
People want to make money not only for the need of it but also for the identity it creates for the person who makes it. After all in today’s world to be successful is to be rich. When so much is at stake it is only natural that the very prospect of ‘loss’ makes people anxious. And the best way to deal with it is not psychological denial but by taking appropriate measures to handle those emotions.
“Distrust and caution are the parents of security”—Ben Franklin
As an investor I think that the intensity of emotions become stronger after we commit ourselves to a particular stock. Because once we commit ourselves to a stock it becomes a case of mistaken identity (ie) we identify the stock as a reflection of our ability and its success for ours. In short, the quality of the result becomes more important than the quality of the process, which can be misleading when trying to work out in a complex system such as stock market. And the best way to deal with the anxieties arising out of mistaken identity is to realize it and incorporate certain antidotes in our investment philosophy.
Stocks Does Not Know That You Own It:
“If you know that the stock doesn’t know that you own it, you are ahead of the game. You are ahead because you can change your mind and your actions without regard to what you did or thought yesterday; you can start out with no preconceived notions. Every day is a new day providing a new set of continuously measurable options”—Adam Smith (of ‘The Money Game’)
A stock does not know us and it has nothing against us or for us. It is we who, by means of our action, try to make profit through that stock. And what guides our action is the ability which leads us through the whole process. And ability is the result of what we have learnt about the game and nobody can learn it in its entirety, just that we can keep on improving. To improve we need to realize our mistake when we have made one and that is not possible unless we are ready to question the validity of an investment. And to question an investment it is necessary that we zoom out and see it for it is rather than what we think it is. And to do that it is necessary that we emotionally detach ourselves from the stock by overcoming the anchoring bias.
Overcoming Anchoring Bias:
The reason I think that people find it hard to book losses is that they substitute the intrinsic value of the stock with their purchase price and thus end up comparing current market price with price paid thus leaving value out of the equation, which leads to all sort of irrationalities. But we can learn to avoid making that mistake by listening to Philip Carret,
"The investor should seek so far as possible to re-analyse each commitment from a detached standpoint. Psychologically this is a very difficult thing to do, to consider dispassionately a venture in which he risked his funds. Nevertheless, the investor should make a determined effort to do just this. If he has 100 shares of a given stock, for example, which is selling at 90, he should disregard entirely the price that he paid for it and ask himself this question: "If I had $9,000 cash today with which to purchase some security, would I choose that stock in preference to every one of the thousands of other securities available to me?” If the answer is strongly in the negative, he should sell the stock. It should make not the slightest difference in this connection whether the stock cost 50 or 130. That is a fact that is entirely besides the point, though the average individual will give it considerable weight”
Conclusion:
“Those who will not face improvements because they are changes, will face changes that are not improvements”—Munger.
And realizing a loss when faced with one is an improvement as compared to ignorance or inaction.
People want to make money not only for the need of it but also for the identity it creates for the person who makes it. After all in today’s world to be successful is to be rich. When so much is at stake it is only natural that the very prospect of ‘loss’ makes people anxious. And the best way to deal with it is not psychological denial but by taking appropriate measures to handle those emotions.
“Distrust and caution are the parents of security”—Ben Franklin
As an investor I think that the intensity of emotions become stronger after we commit ourselves to a particular stock. Because once we commit ourselves to a stock it becomes a case of mistaken identity (ie) we identify the stock as a reflection of our ability and its success for ours. In short, the quality of the result becomes more important than the quality of the process, which can be misleading when trying to work out in a complex system such as stock market. And the best way to deal with the anxieties arising out of mistaken identity is to realize it and incorporate certain antidotes in our investment philosophy.
Stocks Does Not Know That You Own It:
“If you know that the stock doesn’t know that you own it, you are ahead of the game. You are ahead because you can change your mind and your actions without regard to what you did or thought yesterday; you can start out with no preconceived notions. Every day is a new day providing a new set of continuously measurable options”—Adam Smith (of ‘The Money Game’)
A stock does not know us and it has nothing against us or for us. It is we who, by means of our action, try to make profit through that stock. And what guides our action is the ability which leads us through the whole process. And ability is the result of what we have learnt about the game and nobody can learn it in its entirety, just that we can keep on improving. To improve we need to realize our mistake when we have made one and that is not possible unless we are ready to question the validity of an investment. And to question an investment it is necessary that we zoom out and see it for it is rather than what we think it is. And to do that it is necessary that we emotionally detach ourselves from the stock by overcoming the anchoring bias.
Overcoming Anchoring Bias:
The reason I think that people find it hard to book losses is that they substitute the intrinsic value of the stock with their purchase price and thus end up comparing current market price with price paid thus leaving value out of the equation, which leads to all sort of irrationalities. But we can learn to avoid making that mistake by listening to Philip Carret,
"The investor should seek so far as possible to re-analyse each commitment from a detached standpoint. Psychologically this is a very difficult thing to do, to consider dispassionately a venture in which he risked his funds. Nevertheless, the investor should make a determined effort to do just this. If he has 100 shares of a given stock, for example, which is selling at 90, he should disregard entirely the price that he paid for it and ask himself this question: "If I had $9,000 cash today with which to purchase some security, would I choose that stock in preference to every one of the thousands of other securities available to me?” If the answer is strongly in the negative, he should sell the stock. It should make not the slightest difference in this connection whether the stock cost 50 or 130. That is a fact that is entirely besides the point, though the average individual will give it considerable weight”
Conclusion:
“Those who will not face improvements because they are changes, will face changes that are not improvements”—Munger.
And realizing a loss when faced with one is an improvement as compared to ignorance or inaction.
posted by Arpit Ranka at 10:46 PM
1 Comments:
Well said Arpit!
Post a Comment
<< Home