One of the popular songs that is sung by Kenny Rogers is entitled the “Gambler.” It is a song about two men on a train talking about the secret to life. It has a catchy melody, is very popular and easy to sing.
The lyrics of the well-known chorus share this refrain. “You got to know when to hold ’em, know when to fold ’em know when to walk away, know when to run…”
This philosophy and “secret to life” is wise advice and can serve an individual as well in just about all situations and circumstances.
However, unlike the gambler, many stock market investors do not take this counsel. When they have purchased and invested in stock in the stock market, they do not consider the action of walking away from that stock that is a loser.
It can be argued that this refrain is certainly a mantra that should be exclaimed when an investor has money invested in the stock market. Therefore, it may prove beneficial to discuss 5 reasons why investors stay at the “gambling table” or why they keep hanging on to that loser, that losing stock that they have invested in.
1.The hope factor
The first major reason as to why investors hang on to losing stock is the misplaced emotional and heartfelt thinking of hope. Hope is an admirable quality and one that should not be abandoned as it sees and empowers individuals through difficult times.
Hope is not rooted or grounded in logic but wishes for the best to happen despite the outward circumstances that dictate otherwise. With hope, the odds could be against you at a million to one, but the eternal optimist or the person who holds out hope thinks that they may be that one exception out of the one million people.
Therefore, in hanging on to stock that was purchased, even though it may be losing, investors still somehow hope that the stock will turn from being a loser to the restored value and also an increase in the value of the stock’s worth. This hope provides an incentive to hang on to the stock based on this irrational and illogical thinking of the stock rebounding.
Consequently, if the investor finds themselves hanging on to this possibility in hopes of the stock rebounding, the owner is making their decisions based on their emotions rather than the facts. These decisions as to whether “cut one’s losses” are a decision based on subjectivity or emotions rather than the decision being an objective one. This is an extremely poor way of stock investing and subsequently hanging on to losing stock.
2. Investment misinformation
Another reason why stock investors hang onto stocks that are losing is that they believe in a false teaching regarding stock investing. That teaching is not that stocks are a good investment and provides one of the best returns for investments, but that individual stocks always rebound.
The illogical thinking is that because stock investing always rebound then, therefore, the individual stocks comprising the market rise with it. Therefore, if one believes that stocks are still going to rebound, they will be sorely disappointed when the shares that they have invested in continually spiral downwards.
It is crucial for the individual investor to realize that even though the market is a good place to invest dollars, there are other factors that influence the performance of individual stocks. Those individual factors could include weak earnings for the company that the investor owns stock in, major pending lawsuits within the company regarding product or management, economic factors, etc.
Another major reason why investors keep hanging on to that losing stock is because of their pride. Often, as human beings, we do not usually wish to admit that we have made mistakes. This is not only true in our day-to-day interactions, but even in our financial investments. Therefore, by letting loose of the losing stock we, in our minds, would be admitting that the stock needs to go and therefore we are in essence admitting that the purchase of the stock was a mistake.
However, it necessary to let this notion and bias be called out for what it is and make a rational decision to sell the stock rather than continue to hang on to the stock based on the fact that the investor does not want to admit a mistake or that the investment was a poor one. It is safe to assume that we as fellow human beings all experience this reality and rather than sell a loser and admit a mistake the stock is retained to the detriment of the portfolio.
4. Wrong stock investing strategy
Another reason why an individual investor hangs on to losing stock is that they are sometimes uneducated. This assertion means that rather than hanging onto their stock in hopes that it will turn around and regain the money that they have lost, they are uneducated as to the strategy or reality of selling their stock and then claiming a tax deduction on their capital gain losses.
This strategy of selling a losing stock is known as a “tax-loss harvesting strategy.” The basics of the strategy put the loss of money on losing stock in as much of a positive light as possible. This is because the IRS allows for losses on losing stock to be written off or offset taxes when it comes to reporting capital gains or losses.
5. No plan of action
The fifth and final reason that the individual stock investor keeps hanging on to that stock that is losing is that they have never really thought through their strategy or plan of action when investing in the stock market.
The serious investor should never be involved in stock investing on a whim or by the “seat of their pants.” They should have a strategy for investment based on a careful study of the company, their income and expense, their inventory, etc. The strategy should also include other factors as well.
For example, an investment strategy should include staying current on the business of whose stock that you wish to invest in. Therefore, if the company does not meet income projections or if there is a pending lawsuit or there is some negative news about the company’s business released, then you as the investor may wish to sell the stock.
This strategy can be likened to gardening. This is because a gardener tends to their garden on a consistent basis. This process includes watering, providing nutrients, weeding, etc. If the garden is neglected or overrun by weeds, this affects the health of the garden. Like a gardener, the investor should maintain the garden and implement the plan of nurturing. If weeds begin to creep in and they are not weeded out or dismissed, the life of the garden is affected and possibly to the point of dying. Consequently, one’s portfolio needs to be weeded of losing or poorly performing investments.
Also, as part of one’s buying and selling strategy the investor should have a stop-loss order on the shares that have been purchased. This takes the emotion out of the equation as to whether to sell the stock and simply places the decision on the stop loss order and to be enacted by a computer.
Author Bio: Bernz JP – Blogger and owner of Moneylogue.com. He is passionate about personal finance, the stock market, and a digital marketing addict. He also, love to read books on entrepreneurship and technology and always on the lookout for new opportunities.