The hardest decision for an investor

What is the hardest decision for an investor?

There is no doubt in my mind that it is to sell a company’s shares.

I believe that the difficulty largely comes from psychological biases that most of us suffer from:

1. The tendency to like ? we tend to fall in love with our securities;
2. Anchoring ? we are often fixated on the acquisition cost of a security rather than on its market value and our estimate of its intrinsic value;
3. The tendency to avoid inconsistencies ? it is difficult to admit that a past action was a mistake and to reverse it;
4. The tendency to avoid what is unpleasant to us;
5. The tendency to overreact to losses;
6. The disposition effect ? refers to the tendency of investors to sell too soon securities that have appreciated and to hold on too long to those whose value has fallen;
7. The endowment effect ? we attribute more value to an object that we possess than the value that we would attribute to it if we did not possess it;
8. Sunk costs ? refers to our tendency to consider the costs that we have invested in the past in a decision that we must make for the future;
9. Aversion to loss (according to numerous studies, the psychological suffering associated with losses is twice as great as the pleasure we derive from an equivalent gain).

And so on. With all of these biases ganging up on us, it’s no surprise that the decision to sell a stock is so difficult for most investors, myself included.

A consideration should relate to the analysis that one makes of the business model of a company. When we buy a security, we write a “purchase scenario” of a few lines that give the reasons for our decision, including the qualities of its business model and the risks that weigh on its activities. Of course, things inevitably change over time, for better or for worse, and you have to constantly question your initial purchase scenario. When we consider that the scenario no longer holds water, the stock should be sold.

also believe that you should avoid selling a stock simply because it has appreciated strongly. Or, on the contrary, because it has lost a lot of value. In both cases, the decision should depend on our estimate of the intrinsic value of a security. How does this estimate (which we want to be as objective as possible) compare to its market value?

Over the years, I became more and more convinced that it was better to adopt a discipline of two levels of patience: to remain very patient with your winning securities and much less tolerant of your losing ones. But in any case, the decision to sell (or not) a security should be based on facts and, as much as possible, ignore the many psychological biases that make this decision so difficult.