Falling in Love with your Company Stock is not as Luminous as you might Think 

A common phenomenon unbeknown to most retail investors is that investing is emotional, at least for them. Investing should never be emotional; it is a tough call to make. One needs to have a strong mindset and a good grasp of market psychology. It is argued that trading and investing are 20% technical skills and 80% psychology. Despite the fact that most investors know this, shedding emotional investing remains an uphill task. Emotions due to default human nature, will always find a way to creep into investment decisions. You can easily see these emotional behaviors that great marketers have mastered. An individual would opt to buy a low-quality product from an attractive individual compared to a high quality one from a less attractive person. At times, the individual will not even listen to the less attractive individual, and will be sold to optics. This assimilates to how investors find themselves falling in love with company stocks.

Behavioral Consequences

Buying instead of selling

An investor due to his or her liking for a company’s product might blindly find themselves buying into its stock. For instance, an individual might be excited about the Tesla Sedan cars and progressive technology. However, apart from technology and its promising future, there are other pertinent factors that will dictate Tesla’s stock performance such as the integrity of the company’s management. If the executive team at Tesla was to be found in gross financial and operational misconduct, the stock would see a significant downturn. Remember Enron? The company’s top leadership was found guilty of reporting false financial figures that saw it spiral downwards in a short span of time making investors suffer huge losses. Think of Tesla in such a phenomenon, what would happen to investors who blindly and aggressively buy its stock at high prices?

A biased perspective that buying is progressive and selling is retrogressive

Cognitively, people prefer buying and holding to selling their investments. It is a phenomenon that has culturally and subconsciously tagged buying as progressive and labelled selling as retrogressive.  Some investors go to greater lengths to sell unloved stocks. This should never be the case, buy or sell positions should be guided by an investment structure.

Selling a stock to buy another one

Sometimes an individual will look into his or her stock investment and spot a company he or she adores for certain reasons such as popular belief or personal sentimental reasons. The investor will buy into the new stock after liquating a well performing stock. This leads to the menace of high investment turnover that leads to increased risk exposure. Moderation is key while undertaking decisions to sell a stock and buy another. You can opt selling a portion of shares in the performing stock to buy a sizeable portion of the identified stock. More goes into this that an investor should be aware of, for example, it is not shrewd to sell a cheap stock to buy an expensive one. It would cost you many shares of the cheap but performing stock to buy the expensive one.

Holding to losing positions that are beyond your portfolios leverage

Losses are inevitable in financial instruments except for a little few like government bonds whose risk is at almost zero. Stocks can be bought at a good price but still dip to lower prices. A person that has fallen in love with such a company’s stock will mostly hold on to losses. A general rule of investment is that losses should not easily make you exit a position. However, there is a limit your portfolio can fathom. If the losses exceed your calculated limits, it is important to exit it and save yourself greater losses.

Solutions

Look into a company’s sector general performance

Your company stock will more often than not trail what other companies are doing. This will give you relatively informed guidance on a buy or sell decision.

Use a stop loss to avoid excessive losses

A stop loss sets a limit that prevents your portfolio from excessive losses and sometimes being wiped away. Flash crashes are unforgiving to portfolios that do not have stop losses in place. These crashes are rare but they unexpectedly happen and can easily sink your investment. Therefore, know how much you are willing to lose by putting a stop loss in place. Do not get too attached to your positions.

When a company stock has made immense gains, take some profits off the table

Reward yourself by closing some of the positions in profit. Do something with the money, this should motivate you even more towards better investments.

Stocks will hardly love you back, so do not love them

Finally, company stocks do not know whether you as an investor exist, you are perfect strangers. You have no business loving them, because they will not love you back. Instead, be proactive in engaging logic and detach emotions from your company stocks.

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