Jan 07 2009
On selling
In the past I have blogged that the following lines in Sell and Sell Short have helped my trading a great deal…
There is a time to grow and a time to decline. A time to plant and a time to reap.
That cute puppy bouncing up and down in your living room will some day become an old, decrepit dog whom you will have to drive to the vet’s office to put it out of its misery.
That stock you bought with such great hopes and which you enjoyed watching grow has now rolled over and is cutting into your capital instead of increasing it. It is high time to look for an exit.
This book is about selling.
One of the books I read this winter was Predictably Irrational. In chapter 7, the author talks about the high price of ownership and why we overvalue what we have. He gave an example of undergraduates at Duke University who went through a long painful lottery process in order to obtain basketball tickets. Because it was a lottery, some students had tickets while others did not. After the lottery the author tried to play the role of a ticket scalper by looking for bids and asking prices of the tickets. People who did not get a ticket in the lottery on average were not willing to pay more than $170 for a basketball ticket while the people who won tickets through the lottery on average demanded $2400.
When it comes to trading, you cannot cling onto what you think the stock you own is worth. Sometimes the only way you can look at a stock chart objectively is to sit in cash. If you are long or short, your decision making is inherently biased due to the way your brain is wired. It is something to be aware of.
UPDATE: Looks like Predictably Irrational put up a video about chapter 7. Dollar amounts in the video are different from in the book. Strange.