Stock Does Not Know That You Own It

By Amcilrick (Own work)  via Wikimedia Commons

Most of us would have come across many instances during our investment career when the stocks we buy do not go up in price after we have bought it.  Ironically, in many cases it generally goes down after we buy.  In the reverse, the stock we sell is the one that goes high after we sell.  It has happened countless number of times in my investing career. I always wondered if it is the stock that is at fault or us.  I am sure you know the answer but I would like to explain it a bit.

When we buy a stock based on our own calculations, we know how much effort we put to discover this particular stock and also to analyze it after we discovered it before we decided to buy.  We know the pain that we took and whenever we take this pain, we feel that we should be rewarded.
 It is human psychology to always value something more if there has been some of their hard work behind it.  A person who assembled their own furniture that they bought at Ikea would value that furniture higher than the one they just bought ready made from a store.  So, in essence we value our work more than the work that others have put.  Now, we apply that same rule for the stock we buy.  This means that we value this stock now much higher than its actually worth because, we have put some effort to discover it and it is our discovery from our perspective.  The moment we bought it, in our mind this stock is much more valuable and we expect every one to see the stock the same way we see it now.  Please note that before we buy it, we saw this stock as everyone else but once we buy it, we kind off view this with a different glass.  Unfortunately, the stock which is lifeless and without emotions does not know that we own it.  It will not know how we worked hard to find it.  It does noes not know the emotions that you have attached to it.  It is on its own auto pilot mode based on its intrinsic value which gets recognized only on long run.  On short term, it would just happily bounce around to entertain the audience while has people who wants it to go up as well as down at the same time.  Similarly, the stock does not know when you have sold it.  It does not know that it needs to now go down because you have sold it.  It just follows its own path no matter who own it.  It is like an untamed animal in the short run but in a long run, it will always follow the path based on its own fundamental nature of business.

I hope that you realize that clearly that we are at fault as far as our expectation on stocks are concerned.  We expect things to work the way we want to, once we buy in short term.   It is difficult to control/tame in short run however there is nothing that is more rewarding than stock on long term basis.  If you pick the right kind of stock, it will reward you the longer you hold.  If you have picked a wrong/weak one, it will make sure you are punished on long term basis even though it could have given you excitement on short term.  One needs to understand that time in market and not timing is the key thing to investment success.  Time is great friend for good investment/business and worst enemy for bad investment/business.

So, please resist having any emotional attachments with your stocks and start investing sensibly for long term.  Never get married to any stock.  It should be based on merit or fundamental value.  If they do not perform fundamentally, they need to replaced.  Treat stocks like plants in your garden.  When you plant seeds some come out great while others may not do well.  The ones that are doing great should be nourished.and watered.  If the seed you planted gives a bad plant, do not hesitate to replace that with another healthy seed that will give a stronger, efficient plant.  Do not waste your time watering a dead plant (with big losses and no hope of fundamental improvement).  Most of us try to sell our performers and hold losers.  This is like cutting the plants that are productive and growing our weeds.  So, next time you buy or sell, always expect the stock to what it does best and that is to fluctuate and be volatile.