Checking Your Ego Like Warren Buffett= Higher Return
Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Oftentimes we buy stocks, become attached to a successful outcome, and treat them like our own children. We cheerlead, we tell friends about their products, we yell and scream when they go down, then assure ourselves it’s only temporary, that the stock is destined to go back up; after all, we bought it, then we hang on for far too long and watch our capital continue to decline, because we are unwilling to sell it at a loss.
Yes, I’m sure to some degree, if you're honest, you’ll acknowledge you see some of these tendencies in yourself. Don’t worry, you’re not the only one.
I see a manifestation of Stock Ego Syndrome every day. I might write a column critical of a company’s prospects, and BLAM, the torrent of readers I get making incendiary and negative comments about my intelligence seems like it’s a mile long.
I wrote an article predicting that Research In Motion (NASDAQ: BBRY) had lost vast swaths of its former market share, before (luckily for me) the next day it was corroborated by analyst research, and the longs had at me, asking me how dare I criticize the company, questioning whether I passed the second grade using such unscientific measures that weren’t officially stamped by Goldman Sachs.
But here is the challenge. These shoot the messenger types have such an egoist hold on their position, it’s like watching a mother protect her five year old from a predator. And I am here to tell you: your position in a stock is not your child!
The quote the world’s most famous investor, Warren Buffett of Berkshire Hathaway (NYSE: BRK-B), always states “The stock doesn’t know you own it.” At least your children know who you are (most of the time.)
Buffet would listen to the reason behind the analysis, and accept or reject it based on the merit of the argument. Instead many investors lash out at the bearer of seemingly bad news, rather than actually considering the opinion.
Such behavior is likely to have a negative effect on your returns.
Good News Too
Similarly, this can happen on the positive side. Lauding an opinion that fits in your investment thesis. I write a column about Apple praising it, and bam, Apple bulls think I’m a genius.
Some unsavory characters in financial history have used this approach to manipulate the herd and cause a stampede, up or down, it doesn’t matter to them so long as the direction coincides with the bets they’ve set-up.
Hanging on Too Long
A lot of times we hang on too long, unwilling to admit we made a mistake. When Kraft (NASDAQ: KRFT) was making a bid for Cadbury, Warren Buffett who owned a good chunk of the stock, warned the company not to use the undervalued stock to finance the purchase, which would be dilutive to shareholders. His request was ignored, shareholders were set to be diluted, and Buffett promptly sold a good part of his stake.
The situation on the ground had changed, and Buffett acted for Berkshire shareholders. He didn’t sit there wishing things were different, or believe in his heart the stock was worth more even though he analysis led him to believe this would be a long term negative for shareholders.
I’ve made this mistake. I bought Transocean (NYSE: RIG) for precisely the wrong reason. (because John Paulson had added the stock to his hedge funds portfolio) I know next to nothing of the mechanics of offshore drilling, but as negative news continued to pile up, and the stock price dropped, I refused to sell at a loss. The stock has continued to decline, has stopped paying a dividend, and sits over 40% below my purchase price.
The Motley Fool is a really valuable service for investors, because a lot of us writers closely follow specific stocks, and we add what I consider to be valuable information to the conversation. As an investor, it is your job to discern what makes sense and what doesn’t. If you disagree with something, we’d love to hear your opinion as to why, because it may or may not add to my own knowledge/ understanding.
margiecfl has long positions in Berkshire, Kraft, and Transocean. The Motley Fool owns shares of Transocean. Motley Fool newsletter services recommend Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!