By Amir Avitzur – We’re often told that in order to be a successful investor one needs to buy stock at a low price and sell it at a higher price. If you can do that multiple times, you are destined to be rich. Why is it then that so many of us do the exact opposite?

My intention in this article is to have us open our minds and address some key questions we seldom ask ourselves. Reflect upon your answers and consider what they reveal about you as an investor.

Which of the following traits apply to you a few minutes/days before you purchased a stock or shares of a mutual fund?

  • I read a great story about the company and it said that now is the time to act
  • My friend told me she made 100% return on a stock and I asked myself, “why her?”
  • The markets are breaking new highs every other day and I felt left out.
  • I read yet another story about the urgent need to plan for retirement.
  • I learned through a seminar that the only way to make money these days is through the stock market.

Which of the following traits apply to you a few minutes/days before you sold a stock or shares of a mutual fund?

  • I read in the paper today that the economy is going to tank, oil prices are going to skyrocket, and the consumers will have no money left.
  • My friend told me that he now sits on the fence after making “a lot” of money selling his stocks.
  • My stock just dropped another 5% on top of the 20% it already lost.
  • I read yet another story about the urgent need to plan for retirement.
  • I learned through a seminar that the only way to make money these days is to buy gold/silver, purchase a vacation house/second condo, or collect art.

Do any of the above sound familiar? How many times have you asked yourself, “Why did I buy this stock in the first place?” or “Why can’t I make money like Joe?”

As humans, we are driven by several psychological factors that may explain why we are not making the right decisions when it comes to buying and selling stocks. I’ll discuss two of them in this article.

The first factor – The fear of losing (or losing too much)

Consider the following; assume that you had to choose between these two alternatives:

  • A sure gain of $240
  • A 25% chance of gaining $1,000; 75% chance of gaining $0

According to statistics, you should have chosen the second option in which you will gain $250.

Which one did you choose?

Now, consider these two alternatives. Which one would you choose?

  • A sure loss of $240
  • A 25% chance of losing $1,000; 75% chance of losing $0

According to statistics, you should have chosen the first option – a sure loss of $240.

Which one did you choose?

Studies show that people feel the pain of loss twice as much as they derive pleasure from an equal gain. Consider your point of view – would you gain more pleasure or suffer more agony when you win $100 or lose $100? What if the figure were $10,000?

Most investors tend to sell an investment prematurely because they cannot bear to “suffer” any longer. How many times has this happened to you? Even worse, how many times did you witness the stock you just sold rise? An important thing to keep in mind is that the stock does not know you. It is not rising just to upset you. It is all in your head.

So, what can you do about this? How about familiarizing yourself with the value of a company before you purchase its stock? Or knowing the sell price even before you buy? Stay tuned for more on this topic in my next article.

The second factor – the need to be liked and our “urgency” society

As children, we are conditioned to believe that “you are who your friends are.” We develop personality traits similar to those of our friends and tend to act in ways that we believe will get people to like us and want to be around us. After all, don’t we all want to be popular? Who wants to be the kid with no one to play with on the playground?

As we get older, we are also conditioned to buy into society’s urgency mentality. How do you feel when the phone rings? Do you feel a pressing urge to act? The media contributes largely to this mentality by using words like “now,” “last chance,” and “don’t miss the bus.”

These two psychological factors are greatly affecting our investment abilities. When our friends share their investment successes, we want to be on their winning team! When we are told, “be sure not to miss the party,” we immediately feel the need to join the party (wouldn’t it be great at the Friday party to stand together with all your friends and tell stories about your stock market successes)? All the above cause us to believe that the only way to join the party is to do what your friends are doing (in this case buying/selling stocks).

As investors we feel more comfortable with the knowledge that our friends and peers own the same stock. It’s interesting to consider that we feel “better” knowing that if we lose money on a specific stock, we won’t be the only ones!

So, what can you do about this? Remember that deciding not to buy a stock is also a choice that we can act upon. Regarding the need to feel liked, take a moment to consider your end goal. Is your goal in investing to make friends or to create wealth? Stay tuned for more on how to overcome the need to be liked in my next article.

Amir Avitzur

Amir Avitzur fell in love with Metuchen in 1998 and has been a resident of Metuchen since. Amir is married to Sharon, a local Yoga Instructor and an author. Sharon and Amir are proud parents to two Metuchen boys that are currently on the Metuchen swimming team.

Amir has founded and is the president of Avitzur Asset Management, LLC an investment advisory firm in 2004, and provides investment advisory services to Metuchen, New Jersey and New York residents.

Important Disclosure
Avitzur Asset Management, LLC (“Avitzur Asset Management “) is a New Jersey and New York registered investment adviser with its principal place of business in the State of New Jersey. Avitzur Asset Management and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which Avitzur Asset Management maintains clients. Any information contained in this article represents Avitzur Asset Management’s opinions, and should not be construed as personalized or individualized investment advice. Avitzur Asset Management cannot assess, verify or guarantee the suitability of any particular investment to any particular situation and the reader of this article bears complete responsibility for its own investment research and should seek the advice of a qualified investment professional that provides individualized advice prior to making any investment decisions. All opinions expressed and information and data provided therein are subject to change without notice. Avitzur Asset Management, its officers, directors, employees and/or affiliates, may have positions in, and may, from time-to-time make purchases or sales of the securities discussed or mentioned in the Publications. Nothing in this article is intended to constitute individualized investment advice. For additional information about Avitzur Asset Management, including fees and services, send for our disclosure statement as set forth on Form ADV from Avitzur Asset Management using the contact information herein. Please read the disclosure statement carefully before you invest or send money.