How can it be that investors who have a knack for picking winners end up losing money? We can blame the brain – and learn some simple strategies to rewire it.
No matter who said it first, “cutting the flowers and watering the weeds” is a perfect analogy for a terrible investor weakness – selling winners too soon and holding on to losers.
It is common for investors to sell investments that are doing well and hold investments that are on long losing streaks.A clear thesis on why an investment has earned its place in a portfolio can be retested as it does well or badly. As part of an investment team, Hudson is tuned to avoid “thesis creep”, where the reason for owning a stock keeps changing. “If you have a clear thesis, you can test whether things have shifted.
He cites technology company PPK Group as a company still clung to by investors even though it has fallen from $21 in September 2021 to around $1.10 today.Elise Payzan-LeNestour, scientia associate professor at the UNSW Business School, is researching an apparent stubbornness where investors persist in making choices that were rewarding before a shift in the market changed everything. “Viewed from the outside, this looks like completely irrational behaviour,” she says.
The bias is popularly put down to overconfidence, stubbornness or naivety, but Payzan-LeNestour says it is something “way more scary – it is in our neurobiology”.Investors must be vigilant on two points, says Johnson. First, have a clear understanding as to why a stock is owned. Depending on the price direction, an investor’s thesis will be right or wrong.
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