Sophism of total loss and fear of repentance

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In previous posts we have seen risk aversion and fear of making losses. In this post we will talk about a third fear, which together with the other two, form a cocktail condemned to the fact that our investment portfolio feels fatal to us.

Sophism is a false or erroneous argument that is intended to appear to be the truth. The big problem in the investment world is not lying, but lying to yourself, and when we make the wrong reasoning for believing that by being afraid of losing I am making the most sensible decision, there is a high probability of committing a serious error in our investments.

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Sophism is a false or erroneous argument that is intended to appear to be the truth. A very common example is the way in which we justify ourselves when the market is down. Anything that avoids a total loss is considered valid, and it is precisely this type of attitude that leads us to think that the most appropriate thing is not to sell a security that has dropped a lot because, as you already know, you do not lose on the stock market until you sell. Until it is sold, the loss is only "theoretical". These statements carry practical consequences.

On the one hand, the more we lose in a security, the stronger will be the temptation to keep hold of it, buying more often in the hope of recovering the initial position through a rebound. This is when we say to ourselves: "I am lowering the average price of my purchases".

On the other hand, the more we reinforce the position we have in a certain stock, the more difficult it will be to liquidate it or get rid of it. As it drops ever more in value, it becomes increasingly difficult to make the radical decision to dispose of the positions and admit that we have been wrong.  We refuse to accept that all the efforts that we have made have been useless and the fear arises of regretting the decisions made.

If the fear of losing influences our decisions enough, the fear of making mistakes and having to rectify them, also determines them. As with losses, repentance affects us by giving us a bad image of ourselves.

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In general, we usually prefer to do nothing over other possible options and subjectively process the information we receive to avoid discrediting our previous choices. In this case, we leave those shares aside and another quite common self-deception phrase arises; "it is a long-term investment."

Once we buy shares, especially if we have done it after a long decision process, a fairly common behaviour arises. Once we have them, we unintentionally dismiss the news that comes from that company. This attitude is more exaggerated when the share price drops after we have bought stock and we have bought more shares in the same company over time.

This behaviour is not very different from what happens to us when we buy a car or a house. Once we have made the purchase, we carefully endeavour not to read the advertisements of the models of other makes or other real estate offers. We defend to the death the option we have taken although later we see that we could have bought cheaper.

And that repentance hurts our ego, and it is precisely this ego that makes us make many mistakes in terms of investment. That is why independent professional advice is important to help us make decisions with less burden of subjectivity and emotional distancing that allows us to analyse options coldly.

 

 

 

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