It's really not that hard to buy a stock. I mean, if it's your first time, then sure, there's some trepidation, there's certainly the intimidation of the whole process. But if you have bought a few stocks or mutual funds already, it really isn't that hard to buy another stock. Whatever your process, fundamental research, technical, value investing, momentum investing, newsletter tips, CNBC guest analyst tips, Bob from the office tips, once you decide that you want to buy a stock, the actual process is kind of fun. It's a little exciting even. You hit that "confirm" key thinking that you are about to make some money. You go into the stock with a little thing we call "hope."
Now weeks, months or maybe (although not usually) years later, the stock has either made good on some of that hope by going up, stomped on that hope by going down, or simmered your hopes by just hanging around that same price that you bought it for. Regardless, there comes a point when you are thinking about selling it. Here's where the psychology becomes an issue.
Let's say you're up. You bought XYZ at $40, and it's been a hot one. Nine months later it's trading at $80 per share, you have doubled your money. You decide that it might be a good idea to sell now, and lock in your profits. What stops you? There are a number of emotions that control us, even when we know that we should act logically. We have seen stocks go from $40 to $80, then on to $200. That's what stops us from selling at $80. Maybe this is the next (fill in the blank). Call it greed, call it trying to avoid regret, even call it hope. We justify our emotional decisions with logical reasons like taxes, but make no mistake about what is really going on here.
What if the stock hasn't really gone anywhere? If this is during an overall up market, we would probably call that stock a laggard. It's not a loser, but you know you could have done better. What keeps you from selling the laggard? "Well, let's see what it's going to do from here..." You don't feel negatively about the stock, so you hold on to hope.
And if it crashes and burns? We tell ourselves things like, "well, I can't sell NOW! Look at how much it's down!" and "What's the point, it's hardly worth anything now, I might as well hang on and... hope that things get better"
Ultimately, selling a stock or a mutual fund, whether up, down or even, is the closure of that initial hope. If it's down or flat, you are ending that hope and saying, "Well, not this time." And any remaining glimmer is extinguished with the completion of the sale. Even if you are up, you are telling yourself that no more money is to be made here. Time to move on.
I'm convinced that most people are relatively good at picking stocks. There's sort of a Peter Lynch recognition of companies that we think are good. Most people, however, are poor investors. Worse than buying bad stocks, they are poor at selling them when they should.