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Don't Fall in Love With a Stock
One of the biggest mistakes I made when I started buying individual stocks was getting too attached to my investments.
I would put a lot of time into learning about a business, then I would buy some shares and closely follow it.
While diligently following along is critical to being a successful investor, I easily became over-committed. I held onto some investments for way too long. Once I committed to an investment I found it difficult to change my mind. I looked for data points to confirm my bias towards continuing to own my existing investments and ignored information that signaled that I should sell.
Part of the challenge is we’ve all been told to simply buy and hold forever. The media and investment professionals promote this approach ad nauseam. This may work with an index fund. But it’s not a great strategy if you buy individual stocks.
Now, I only buy a stock that I believe will outperform the market over a six-month to three-year period. I also reevaluate all my holdings regularly and change my mind frequently as to what stocks I think will continue to outperform.
What causes me to change my mind when it comes to a particular investment?
I change my mind when I have new information
New information is available all the time. What may have been true yesterday may not be true the following day. Even the most well-managed companies face unforeseen challenges from factors like weather, supply chain issues, new technology, or macroeconomic forces that are completely outside of their control. When there is new information, I use it to reevaluate my positions and make smart decisions.
The market is always looking forward, it doesn’t look back. New information informs the direction investors believe a stock will go. This is important to understand.
For example, I didn’t like Tesla as an investment for a long time. They lost lots of money, hadn’t proved they could produce cars at scale and were in a business that was notorious for bankrupting new players. Eventually, they proved, (most of) the doubters wrong and built what now to me looks like a sustainable company. New information changed my perspective on the business and I think it’s a solid investment, for now. And my opinion on it may change in the future as new information becomes available.
Sometimes I change my mind after I make a mistake
I make lots of mistakes and there is nothing wrong with that. I don’t need to be perfect when it comes to stock picking. I do my best to remain humble and admit a mistake.
I bought PG&E at one point when I first tried stock picking. I have no idea why. They were in the news and I thought it was cheap, which is not a great reason to buy a stock. I got lucky and watched it bounce up for a 25% profit. I should have sold, and didn’t. That was a huge mistake. It then trended back down and I sold it for a small loss.
I learned a lot from that experience.
Now when I buy a stock I make sure to have a plan. I need to know A) why I bought it and B) when I would sell it.
Buying in small increments gives me time to change my mind
Like many people today, I am somewhat of a busy body. I check stock prices on my phone all the time and love to stay up to date on the latest news. By buying in small increments, it gives me something to do when I log in and check my account.
I rarely make a big buy all at once. I like to take time to ponder what I bought, continue to look for new information, and examine if my thesis is correct.
It’s easy to get caught up in the enthusiasm and excitement around a hot stock. To counter this I set rules for myself on how much I can buy on a given day, reminding myself that prices fluctuate. They don’t always go up. And I can always buy more the following day if I like a stock.
I can change my mind for no good reason and that’s okay
There are no rules in stock investing. Everyone is free to make their own decisions. This is liberating, but it can also be debilitating. When you’re free to do as you please it can be very hard to make up your mind.
For me, it’s important to know that I don’t need a good reason to make a change to my portfolio.
There are times when I just don’t want to own a particular stock and I don’t need a reason to sell. I just sell. There isn’t anything wrong with this. Just knowing I can sell whenever it pleases me helps me stay emotionally detached, which I think makes me a better investor.
Unlike houses, real estate, venture capital, collector pokemon cards, or any other illiquid asset class, stocks have a massive benefit, they are easy to sell. It’s one that I take full advantage of—because I can always get back in whenever I want.