Do You Love Your Investment Holdings?

Consider your investment portfolio. Do you hold stocks (or other securities) in companies that you love? Do you tend to disregard or ignore articles that highlight the bear case for that investment? If yes, you could setting yourself up for a common pitfall when it comes to investing. Falling in love with an investment is one of the worst things an investor can do for overall returns. As humans, it is in our nature to like/love things that are familiar to us. This is not just applicable to stocks or investments, but for everything in life.

I was recently listening to the Masters in Business podcast with Daniel Kahneman. Daniel Kahneman is a world renowned psychologist, best known for his work on the psychology of judgement and decision-making. Even though he is a psychologist, he is a Nobel prize winner in economics (awarded in 2002). His research explained and shed light on why the investing world falls for the same traps over and over. One of his most cited study is the Prospect Theory, which among other things summarized that humans value gains and losses very differently. Losses have a far more emotional impact than equivalent amount of gains. For e.g., losing $5 has a stronger emotional impact on most people than finding $5. The overall psychological impact is charted as shown below from the Kahneman & Tversky study. As noted, the curve falls faster towards the left than it rises on the right, indicating the overall psychological impact.

prospect-theory

I highly recommend you listen to the podcast, but if you do not have the time or patience, have a listen starting at the 41:45 mark. As Prof. Kahneman explains, the familiarity of ownership makes humans think highly of that entity. In his words, “Almost everything that is familiar….you like better”.

No Place for Emotions

This is what investors tend to do with their portfolio holdings. As is always the case, its easy to say that investors need to remove emotion from the decision making process, but its easier said than done. It’s ingrained in human nature…there’s nothing wrong with it. The successful investors take a step back, identify the problem, remove emotion from the context and make the right decision. There is no place for emotions when it comes to investing. It is important to identify and keep such things in check. I know I fall for this trap myself and constantly work on identifying such problems and correct my mistakes on a regular basis.

The interesting point about this is that each investor approaches new ideas with a healthy dose of skepticism. When there is no familiarity, you tend to question everything and take an idea apart and are critical. This is a good thing to do. Same kind of criticism should be taken to current portfolio holdings (or even investing style). The path towards complacency is a slow one and catches investors by surprise when the fall eventually comes. You approach a new idea with skepticism, slowly you wade in taking a small risk, you get familiar and realize that your skepticism was unfounded or the reward paid off against the risk taken……after a few months, you become even more familiar and comfortable. Next thing you know you are growing confident and start loving your investment idea until you reach a point of hubris.

I have identified that I was too tunnel-visioned on dividend investing. The monthly and quarterly payments are like a drug giving me a little pleasure regularly keeping me happy. But I was missing the big picture. My thinking was — If I sell my holdings, my passive income will decrease and I will miss my goals. I need to keep buying paying a higher multiple on the stocks that appear safer. I finally decided to take a step back and realize that I was risking a big part of my assets to make 2-3% in income. That’s when I had the awakening and decided that I need to sell and get out of this crazy market. Read the post here.

It is one of the reasons why I regularly talk to Jay from FI Fighter. Not only do we bounce investment ideas off of each, but we also discuss some of the pitfalls that we have faced personally and/or see common in marketplace. On surface, it may seem like his focus changes too quickly from dividend investing to real estate and then to precious metals, but he has avoided those pitfalls of falling in love with one investment strategy. There are numerous ways to achieve financial independence, and falling in love with a single strategy is not one of them. It reminds me of a quote from Charlie Munger: “Any year that passes in which you don’t destroy one of your best loved ideas is a wasted year.”

Summary

Most investors tend to fall for similar pitfalls over and over. Only the successful investors identify such issues and take the necessary steps to re-evaluate investment ideas. Falling in love with investment holdings due to familiarity is something that is ingrained in human nature and should be avoided. It is important to treat existing holdings as if it’s a new investment and approach with the same dose of skepticism and criticize the idea as you once did pre-investment. I invite you to make a bull and bear case to each of your holdings and justify on why you are staying invested in that security. If you are honest with yourself, the results may surprise you. I know they surprised me.

16 thoughts on “Do You Love Your Investment Holdings?

  1. Well said R2R. We have relatively few long term holdings, but do revisit those holdings twice per year. Earlier this summer we sold off many of our DGI investments, because we thought the risk reward balance was not in our favor. I also really enjoyed that podcast, and particularly thought the discussion about recognizing our own individual biases was very important. Thanks for sharing buddy. Have a great week

    -Bryan

    • Glad you hear that you enjoyed it, Bryan. I hear you on the shifting risk-reward balance…as Ive discussed I am in the same boat and have been moving away from some of the overvalued stocks. The DGI model says never sell, but these are not normal conditions anymore. I’d rather look towards asset protection and safeguard my funds.

      Best
      R2R

  2. I completely agree with you. You must detach yourself from your investments. Sometimes, this can be difficult especially with the amount of work and research as well as the financial investment involved.
    D4s

    • Hi D4S,
      Its something that we have to keep in mind and remind ourselves regularly as investors. Unfortunately, its easier said than done…but if we are mindful and try our best at taking the emotion out of the equation, we can continue to improve as better investors.

      R2R

  3. Great post R2R. Falling in love with a stock is a dangerous thing. I review my portfolio of stocks after every on of the company’s earnings calls. If I don’t like what I see, I flag that stock to watch more closely and make my decision to move on either just before or after the next earnings call. I also pay attention to the overall market. It’s no secret that I’m not happy with the hotness of markets today. I’ve recently sold 30% of my portfolio and I’m holding most of the cash. This was unpopular with many of the bloggers who follow me, but it’s my money and I did what I think s right.

    • Hi IH,
      Thats a good way to evaluate constantly. If something sounds bad, put it on a monitor/watchlist and think objectively. No need to panic at the first sign of trouble and jump the ship on all your investments. Having said that, I agree with your sales as of late — as you know, I did something similar…I am building a cash reserve to take advantage of the coming volatility.

      Best wishes
      R2R

  4. Very good point R2R and I agree with you completely. It is easy to fall in love and if it goes sour, you can hang on far longer than you should. At the moment I’d like to think I don’t ‘love’ any of our investments, just their potential – which is why we hold them. If they don’t have future potential, then we would & should sell them.

    Tristan

  5. This is the quote where I disagree with you: ” I finally decided to take a step back and realize that I was risking a big part of my assets to make 2-3% in income.”

    You do realize that you can earn capital gains, along with your dividend income, right?

    • Hi DGI,
      I have realized those capital gains already 🙂 (atleast for this cycle). In a perfect world, you simply keep investing and the market grows steadily and we investors benefit with rising dividends and also get to cash out with good capital gains. But its not a perfect world and this market cycle is anything but ordinary.
      My reasoning is that this cycle seems to be too far stretched for my taste (purely based on my personal risk-reward take) and for me to risk my capital. We have been through the earnings growth phase, been through the multiple expansion and are currently undergoing the earnings shrinkage. Next comes the multiple compression. Its simply a question of when and what will trigger it. It can either come when the broad market realizes this and hits a critical tipping point, or with the increase of interest rates (the reason why investors have paid higher PE on stocks is because of low rates, so if rates increase, whats the point of being in the high multiple PE stocks?).

      Anyway…all things considered, the chances of making great gains are behind us in this low return world — and I will wait for the fat pitches instead.

      R2R

      • I actually agree with the general theme of the article that you should not fall in love with your investments.

        But I think that successfully timing stocks is incredibly impossibly hard for 99% of investors out there. You have to be right twice in order to sell at the high price, and then to be patient and buy at the low price. And the sad part is that neither of us knows where stocks will be in a decade. It seems like a lot of people are expecting stocks to go down, but they haven’t. Earnings on S&P 500 are down, but we have energy responsible for this. In my investing, I have found that there has always been a “reason” to sell, but this “worry” seemed silly in retrospect. Any time I have sold an investment, I have regretted it. Even if I had a good reason to sell – like a dividend cut for example.

        On the other hand, as my networth and dividend income are getting closer and closer to my financial independence point, I have found that buying some fixed income with new cash has been a decent idea. It will deliver terrible results in the future, but it also provides some “insurance”.

        I somehow think that it is natural to be more risk averse if you have a lot of money, than if you don’t have a lot. I mean if all you have is $1,000, you can daytrade penny stocks and not worry if you lose it all. You can easily replace that $1,000. But I you have $1 million, and it has taken you a lifetime to accumulate that amount, it makes sense that you will be risk averse. If you double the money to $2 million, that’s great and now you can theoretically buy twice as much stuff as before ( though you don’t really need twice as much). But if you lose that $1 million…You have to start fresh and life will be tough.. Living on the streets is not much fun ;-( ( so that’s why you don’t invest the million like you invest $1,000)

        • Hi DGI,
          I agree that a perfect timing of markets isnt possible, no matter how smart an investor is. No one in the history has been able to perfectly time it and I dont see it being a possibility in the near future either. But am I happy with making 30%, 50%, 80%, 100% gains? Yes I am. Am I happy with making 20-25 years of dividend returns in one year? Absolutely. Like Jay from FIFighter puts it, “Forget about the top 10% and the bottom 10%. The middle 80% is identifiable and thats what you want to ride”.
          Whether its the right move or not, only time will tell. Who knows….the central bankers can continue buying stocks and corporate bonds putting a floor on how low the markets can fall….in which case, I would have been better off staying invested. But as the central banks’ balance sheet grows and confidence falls in all things paper, I am not willing to play this game of who has the stronger paper. It is why I am moving my funds to real/hard assets such as gold/real estate. The way I look at it, the Fed will either be successful or unsuccessful in creating inflation. In one case, DGI stocks will do well, but in both cases – hard assets will do well. I like my bets placed in hard assets at the moment.

          As for the second point, I hear you. You seem like you are closer to retirement/FI, which means you are looking to maintain your income and want to stay invested. I am still pretty far from reaching FI, and my focus is on asset protection as I try to grow my net worth.

          Best
          R2R

  6. Hi R2R,
    I’ve been slowly moving away from individual stocks towards indexes as I continue to invest; I can’t really justify the risk in individual stock holdings.

    That said, I must admit that I am more inclined to invest directly in say AT&T than T-Mobile simply because I send AT&T money every month for my phone bill; ditto for companies I bank with, companies I shop at or whose products I use a lot of. This is really all “play money” in any case since individual stocks are becoming a much smaller percentage of my overall portfolio.

    Best wishes,
    -DL

    • I hear you, DL. I am starting to move more towards index funds as well as my life gets busier and I cannot dedicate enough time towards researching and staying on top of each of my holding. In addition, there are not many fat pitches in the market these days, so I am ok with taking a step back and waiting for juicier opportunities.

      Good to hear that you are getting some of your money “back” by investing in companies whos services you use 🙂 I try not to focus too much with that, but I do take refuge in the fact that some of these companies like telecom have become utilities now and its hard to live without the service in this day and age.

      cheers
      R2R

  7. You collect physical gold or only paper gold? I’m a buy and hold but with a few exceptions. But everyone has to go with what works for them.
    A younger person that has 40 plus years even if they plan on retiring early can take some risks even as I am in my early 40s I am keen on taking risks as my look is long term.
    If what you are doing is working for you then keep doing. If it’s not tweek it a little.

    • I dont have any physical gold, although Ive been planning on buying some lately. Right now my exposure has been mostly through mining companies and streamers. I wouldnt go with ETFs like GLD.

      Best
      R2R

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