My personal disposition effect

[Lupo Lupus]

 

 

The disposition effect is well documented in the academic literature: investors sell winners too early, and hold onto to loser for too long.

 

I just analyzed whether my personal investment decisions have also suffered from this problem, and I wanted to share this here as it might be a useful for exercise for other investors to undertake.

 

Basically, I looked at the performance of stocks *after* I sell them, relative to an appropriate benchmark (for a complete picture I may also study performance prior to sale in the future).

 

The result is that my winners perform better post-sale than my losers. So I may indeed suffer from the disposition problem! As my winners still underperform the benchmark post-sale (even though they are better than the losers), it does not mean though that I should hold onto winners for longer. However, I may try to shorten the holding period for the losers.

 

 

 

[scorpioncapital]

Would it make a difference on the reason that a winner or loser is sold in part or in full? Like a P/E that appears too high? or a management behaviour?

 

[Lupo Lupus]

Would it make a difference on the reason that a winner or loser is sold in part or in full? Like a P/E that appears too high? or a management behaviour?

 

I have not seen anything on this ... what has been established though that winners sold by individual investors outperform subsequently, while losers underperform. And I think this has also been linked to the individual portfolios (ie, a "winner" in the investor's portfolio, not only a winner in the market), thus suggesting behavioral explanations.

[Liberty]

 

 

The disposition effect is well documented in the academic literature: investors sell winners too early, and hold onto to loser for too long.

 

I just analyzed whether my personal investment decisions have also suffered from this problem, and I wanted to share this here as it might be a useful for exercise for other investors to undertake.

 

Basically, I looked at the performance of stocks *after* I sell them, relative to an appropriate benchmark (for a complete picture I may also study performance prior to sale in the future).

 

The result is that my winners perform better post-sale than my losers. So I may indeed suffer from the disposition problem! As my winners still underperform the benchmark post-sale (even though they are better than the losers), it does not mean though that I should hold onto winners for longer. However, I may try to shorten the holding period for the losers.

 

very interesting exercise, and probably something that I suffer from too. Though I've not explicitly done the work, I've been mentally keeping track of things and it certainly feels like I keep losers too long and have sold winners too early in the past. I'm trying to do better on that front, but I think I should probably find a more systematic approach to dealing with the problem...

 

Thanks for bringing it up. Cheers.

[beerbaron]

 

 

The disposition effect is well documented in the academic literature: investors sell winners too early, and hold onto to loser for too long.

 

I just analyzed whether my personal investment decisions have also suffered from this problem, and I wanted to share this here as it might be a useful for exercise for other investors to undertake.

 

Basically, I looked at the performance of stocks *after* I sell them, relative to an appropriate benchmark (for a complete picture I may also study performance prior to sale in the future).

 

The result is that my winners perform better post-sale than my losers. So I may indeed suffer from the disposition problem! As my winners still underperform the benchmark post-sale (even though they are better than the losers), it does not mean though that I should hold onto winners for longer. However, I may try to shorten the holding period for the losers.

 

very interesting exercise, and probably something that I suffer from too. Though I've not explicitly done the work, I've been mentally keeping track of things and it certainly feels like I keep losers too long and have sold winners too early in the past. I'm trying to do better on that front, but I think I should probably find a more systematic approach to dealing with the problem...

 

Thanks for bringing it up. Cheers.

 

Easy to check, make two portfolios when you sell portfolio a goes long and portfolio b goes short.

 

Very little people do it. I don't but I do feel like it would be a great metric... if only I did more than 2 trades a year these days.

 

Beerbaron

 

 

[Uccmal]

Interesting topic.  In April 2009 I bought Leaps on HD, Sbux, Ge, and AXP.  Rather than exercising them I sold them.  HD, Sbux, and axp, are all up multiples of what they were when I bought the Leaps. 

 

After that I have really worked at keeping my winners and selling my losers.  I am merciless with the losers now.  When the tide turns for whatever reason I have learned that they usually get worse before they get better.  So I unload quickly and completely.  I have done this with Seaspan, and Aimia Prefs this past year.  I am willing to take a loss.  After 30 days I can always buy back. 

 

Aimia prefs as it turned out came back to above my PP, but this was very uncertain when I sold them.  And the uncertainty has only grown.  The thesis is totally different. 

 

It helps that I adjusted my style to only buy long term GARP stocks as cheap as I can.  But this is partly a sign of the times.  Nothing has been cheap since Canadian stocks in late 2015/early 2016. 

 

Some degree of diversification helps, and holding stocks that pay you to wait, and even better pay you more each year to wait.  I hold only one stock that doesn't pay a dividend.  Its alright for Buffett to pay no dividend but ALL other established companies should be paying dividends that they increase each year. 

 

The longer I have been at this the more I subscribe to GARP.  Over the long term, widely held stocks, that are necessary for the economy to function will outperform the indexes.  The objective is to not have sell your losers because you hold none.  You aren't going to hit the ball out of the park with any one investment, but right now, at this stage of the cycle, thats not going to happen anyways. 

 

[DooDiligence]

Interesting topic.  In April 2009 I bought Leaps on HD, Sbux, Ge, and AXP.  Rather than exercising them I sold them.  HD, Sbux, and axp, are all up multiples of what they were when I bought the Leaps. 

 

After that I have really worked at keeping my winners and selling my losers.  I am merciless with the losers now.  When the tide turns for whatever reason I have learned that they usually get worse before they get better.  So I unload quickly and completely.  I have done this with Seaspan, and Aimia Prefs this past year.  I am willing to take a loss.  After 30 days I can always buy back. 

 

Aimia prefs as it turned out came back to above my PP, but this was very uncertain when I sold them.  And the uncertainty has only grown.  The thesis is totally different. 

 

It helps that I adjusted my style to only buy long term GARP stocks as cheap as I can.  But this is partly a sign of the times.  Nothing has been cheap since Canadian stocks in late 2015/early 2016. 

 

Some degree of diversification helps, and holding stocks that pay you to wait, and even better pay you more each year to wait.  I hold only one stock that doesn't pay a dividend.  Its alright for Buffett to pay no dividend but ALL other established companies should be paying dividends that they increase each year. 

 

The longer I have been at this the more I subscribe to GARP.  Over the long term, widely held stocks, that are necessary for the economy to function will outperform the indexes.  The objective is to not have sell your losers because you hold none.  You aren't going to hit the ball out of the park with any one investment, but right now, at this stage of the cycle, thats not going to happen anyways.

 

+1

[scorpioncapital]

The price sold vs retrospective maximum potential achieved is the insurance cost of the portfolio. It's like a natural put. You could also track it against the potential long term compound reduction over benchmark. If you use leverage, I'd buy more insurance, if I didn't use leverage I'd buy less insurance (let it run longer).

 

[John Hjorth]

Tweet by Ian Cassel referring to a telephone conversation between Mr. Buffett and and Mr. Lynch on the topic. [Thank you for guiding me to it via your retweet, DooDiligence.]

[Rod]

A very interesting topic. I don't think that you can really automate selling with a one-size fits all rule like "sell if it drops 20% after buying". A rule like that will eliminate anchoring biases. But it also eliminates intelligent decision making. I think that's a losing deal. If you want to sell your "losers", you need to decide what a "loser" is. A loser isn't a stock that has dropped, it's a stock that has dropped and its prospects are worse than you originally thought. The former you want to hold or buy more. Only the later would you want to sell.

 

My favourite way of combating sunk cost fallacy with a declining stock is to ask myself if I would buy it now if I didn't already own it. Or would I recommend someone in my family buy it at the current price. That usually tells me what I need to do. If selling is warranted it's hard to carry through but I've managed to do it.

[Jurgis]

So when BRK dropped 50% (twice so far) investors should have sold it immediately? You know "weed" and all that...  ::)

[John Hjorth]

If you want to sell your "losers", you need to decide what a "loser" is. A loser isn't a stock that has dropped, it's a stock that has dropped and its prospects are worse than you originally thought. The former you want to hold or buy more. Only the later would you want to sell. ...

 

Thank you, Rod.

 

Very good post, - at least to me. It has a lot do to with ones own line of thinking, related to the thesis, at the point of time when buying in to the stock. Is the thesis still intact, or is it not.

 

Confirmation bias tends to generate thesis drift inside ones brain. The brain starts reaching out for straws, if one let it. Personally, I'm a master of that particular discipline.

[DooDiligence]

Tweet by Ian Cassel referring to a telephone conversation between Mr. Buffett and and Mr. Lynch on the topic. [Thank you for guiding me to it via your retweet, DooDiligence.]

 

Glad for at være til hjælp (did Google translate get that right?)

[John Hjorth]

Yes, DooDiligence, - even the "æ".