The Conventional Investor’s Psychology and The Turkey

Have you ever found yourself hesitating to sell your stocks at a loss, holding on with hopes for a rebound?

“I can't sell that stock because I don’t want to actualize my loss.”

Sounds familiar?

I like to share the Turkey Story with my clients to illustrate how the conventional investor thinks when the time comes to make a selling decision:

“A little boy was walking down the road when he came upon an old trying to catch wild turkeys. The man had a turkey trap. A crude device consisting of a big box with the door hinged at the top. This door was kept open by a prop, to which was tied a piece of twine leading to the operator. A thin trail of corn scattered along a path lured turkeys to the box.

Once lured inside, the turkeys would find an even more plentiful supply of corn. When enough turkeys had wandered into the box, the old man would pull the prop and let the door fall shut. Once the door's shut, he couldn’t open it again without going up to the box, and this would scare any turkeys that were lurking outside. So, the time to pull away the prop was when as many turkeys as one could reasonably expect were inside.

One day he had a dozen of turkeys in his box. Then one sauntered out, leaving 11. “Gosh I wish I had pulled the string when all 12 were there,” said the old man. “I’ll wait a minute and maybe the other one will go back.”

While he waited for the 12th turkey to return, 2 more walked out on him. ” I should have been satisfied with 11,” the old man said.

“Just as soon as I get one more back, I’ll pull the string.” Three more walked out, and still the man waited.

Having once had 12 turkeys, he disliked going home with less than 8. He couldn’t give up the idea that some of the original turkeys would return. When finally there was only 1 turkey left in the trap, he said, “I’ll wait until he walks out or another goes in, and then I’ll quit.”

The last turkey went to join others, and the man returned empty-handed.”

?

The psychology of normal investors is not much different.

Many investors hesitate to sell at a loss, hoping for a rebound. They hope more turkeys will return to their “box” when they should be fearing that all the turkeys could walk out and they will be left with nothing.

Moral of story: Winning in the market isn't about being right all the time; it's about limiting losses when you're wrong.

And that’s exactly how I manage my funds invested in the markets.

How about you?

- this story was told by Fred C. Kelly, author of “Why You Win or Lose"