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Human behavior - why we hate a sale

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  • Human behavior - why we hate a sale

    The trend is your friend, say the analysts. Don't fight the trend is a variation of this oft-used advice, if you can call it that. Ride your winners and sell your losers, shout the guests on CNBC. Put a stop loss order - so you can sell when the stock goes DOWN 10-20% from your purchase price is also a familiar refrain.

    And what exactly is their track record? Anyone's guess. Since their record is hardly discussed. The agenda is always geared toward moving on to the next prediction. The pundits who recommend buying stocks that have already gone up and vice versa are respected. And those who pore through the financial statements and provide a reality check do not meet the "sex appeal factor" of the "news" outlets.

    The mutual funds play thus game as well. It is called window dressing. Towards the end of the quarter, they sell the losers and buy more of the stock that did well. Thus giving the hapless shareholder the (wrong) impression that their fund invests mainly in stocks that do well. In Wall Street parlance, this is putting lipstick on a pig.

    With greater access to technology, the individual investor is fooled into thinking more (information) is better. Her attention span is limited to 30 sec Max on each story, since she has to click on news pouring in from the various gadgets. Result? Disastrous. She has no time to dig under the hood. All the information she receives is what The Street wants her to receive. Like the 20-25% expected growth rate for a company already earning in the billions of dollars range. Or that this time it is different - bonds can only go higher. Ditto gold.

    When things are bright, investors get sucked in AFTER a huge move. Just in time for the big boys to unload their assets. And when things are at their gloomiest, the news outlets bombard us with SELL signals. And we oblige.Been there. Done that. It ain't a good feeling.

    In 2000 Ram, Balram AND Sitaram all were bullish especially on those "can't lose" Tech Stocks. In March 2003, with the tech earnings falling off the cliff, they ran away from the high P/E tech stocks when they should have run towards it. In 2007 Oct, Tech was replaced by bullishness in Financials. And March 2009 was a replay of March 2003 - with Financials.

    With gold at all time high in 2012, folks opined this time its different. That gold will always be safe. Famous last words. Did you know since circa 1880 Gold has UNDERPERFORMED inflation? It is up only 25X. Of which, a factor of 7.5X move occurred between 2002 and 2012. (In other words, from 1880 to 2002 gold was up only 3.2X! Or doubled every 80 years. For a rate of return of 0.9% per year! WITHOUT DIVIDENDS.

    With 10 yr bond yields hovering at 1.6% same bullishness expressed. Rest is history.

    So friends, don't chase hot stocks just because they have gone up. And don't sell stocks just because they dropped. Control your BEHAVIOR. Enjoy a sale. Look for quality.

    But MOST IMPORTANTLY, decide on your asset allocation. Buy cheap index funds (domestic and international). And rebalance - say ever quarter. That's all.

    About the writer: who cares?
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