The Only Question Successful Investors Always Ask Themselves!
The question successful investors. If I didn't own this stock or bond now, would I buy it again? If you are not willing to hold a stock for 10 years, don't think about holding it for even 10 minutes.
Imagine that you will take a 10-hour flight from Istanbul to New-York, but the airline company has set a new flight policy right before the plane takes off. According to the new policy, being able to recline your seat has now become a debatable issue.
This raises two questions: First of all, as the person who tilts his seat back, how much money are you willing to pay for 10 cm to the person sitting behind you and who will be affected by this situation? The other question is how much does your seating area cost to the person sitting behind you?
Researchers run an experiment, and it turns out that the passengers agreed to pay a maximum of $ 12 to recline their seats, and they wanted at least $ 39 to sell the legroom in front of them.
The difference can be explained by the trend in behavioral economics, which workers define as the "ownership effect" and claim that people value more what they have than they don't. So if you're the person sitting in the back, your leg distance is worth $ 27 more than the person sitting in front of you just because it's yours.
In his book "Stumbling on Happiness", a psychologist and author named Daniel Gilbert describes how the effect of possession has touched our lives knot by knot. According to him: “After consumers' view of kitchenware, job seekers' view of any job changes more positively after accepting the job and high school students' view of a university is accepted”.
In other words, a toaster, a position, and a university can be extremely bright and charming. However, once we have them, they suddenly become brighter and more attractive.
A Mental Trap for Investors
You probably think it is harmless to value more what we have, but it is not what it seems. For example, if you have a losing investment, it may cause you to hold on to it too much.
This is something that happens all the time. Investors try to make an estimate by looking at the amount they paid for a stock six months ago. On the other hand, they try to calculate whether it will fall until the purchase price. But in reality, investments don't care how much you pay.
Another factor that detracts from investors is their tendency to avoid loss. Research shows that we perceive losses with an intensity of 2-2.5 times higher than gains. In other words, we like gains but we hate losses much more.
As a matter of fact, we can talk about two different forces that work against the investor: They fall in love with the investments they have and hate to lose. This is one of the reasons investors have remained stuck with lousy investments for years without potential gains.
To avoid this trap, successful investors have a question asking themselves for each investment they have:
“If I didn't own this stock or bond now, would I buy it again?”
If the answer is no, buy it. If yes, don't sell. Yes it is that simple.
Even Warren Buffet Observes This Rule
Warren Buffet first introduced this idea in his 1996 annual letter to shareholders:
"If you are not willing to hold a stock for 10 years, don't think about holding it for even 10 minutes."
In the letter he wrote in 1998: “… this year we made two major purchases, Coca Cola and Freddie Mac (Federal Housing Loan Agency). We are planning to keep these shares for a long time. He even said that "forever" is our favorite retention period when we buy stock of great companies with great management.
Despite this, he sold his Freddie Mac shares in 2000. In the letter he wrote in the same year, he legitimized this sale with the following words: “Therefore, we try to make our predictions as conservative as possible and to keep our focus on sectors where unexpected events may not ruin their owners. However, we make many mistakes. If you remember, I am the man who thinks he understands the economic future of bonus coupons, textiles, shoes and second-wave stores ”.
As a result of your selling process, the way you invest should become more refined and your decision-making skills should improve. As a result, your portfolio will be better.
The Market Doesn't Care How Much You Pay
It is very difficult for investors to sell, especially when they experience losses, but the important thing is that your money is invested in the best possible way. This means re-evaluating the investments you have made in the past. As billionaire Sam Zell said:
"Every time you don't sell, you are buying."
According to research, it is not normal for us to think like that. We have a tendency to focus on what we lose rather than what we gain. This is the reason why we stay in losing investments, in business and in bad relationships.
We think we will do better next time. However, we do not have such a chance. We do not have the chance to start things over and over again.