Why Selling is Harder than Buying

(1100 words)

Selling well is equally as important as buying well, possibly more so. But selling causes far more anxiety than buying. These are my notes from an essay by Donald L. Cassidy “Why it is so Difficult to Sell” from The Psychology of Investing:

We see buying as a positive action, selling as negative. Buying opens the door to possibilities for profit, wealth and the ego satisfaction of being right. Selling is the opposite. Even when we make a profit we are left with the thought that we are making a mistake, the stock might go higher. If we are taking a loss, selling is an admission of failure, we were not as smart or lucky as we thought.

Media

The media tends to confirm the existing market trend up or down, it never contradicts it. This constant reinforcement causes us to ignore contrary evidence. Repetition of yesterday’s reasoning lulls us into a comfort zone of fuzzy logic and non-reason. We think we are aligned with reality so we don’t take action. We become biased towards holding and against selling.

Brokers

Investors who use full service brokers receive more buy than sell advice, in a ratio of 8:1. A broker can approach all of his customers with a ‘buy’ advice, but can only sell for clients who already hold stock in the company. Issuing an advice to sell can also cause the brokerage firm to lose a potential corporate client.

Brokers may use the following words when they mean ‘sell’:

• hold,
• accumulate,
• long term buy,
• market performer,
• perform in line,
• underperform,
• underweight,
• market weight.

Information Overload

The financial  segment of the nightly television news reports to us five or six economic indicators, often contradictory, all cited out of context. The presenter usually gives us a glib reason why markets have risen or fallen that day, even though there are usually many and complex reasons which nobody truly understands.

We have access to advisory services, CNBC, Bloomberg TV, internet chat rooms, all giving multiple conflicting opinions. We rarely have time for quiet reflection. Our natural tendency, given conflicting advice is to hold.

Three Pieces of Information

Three pieces of information we always carry are both vivid and irrelevant:

• the stock’s all time high,
• its highest price since purchase, and
• the price we bought it at.

History has already proven the all time high was a temporary mistake which has been corrected. The highest price since purchased is irrelevant to everybody else in the market. Purchase price is also arbitrary. The only exceptions are those price levels where high volumes of stock were traded or where big amounts of stock were issued.

Selective Memory

The memory of that one stock you sold at the bottom before it made huge gains turns into a lifetime excuse for believing every dog can rise from the dead.

Local Companies

Local companies are often championed by your local press because they employ locally, local people speak favorably about it, it gives corporate sponsorship to the local volleyball club and it advertises in the local press. Continuous good news coverage causes these companies to enter your investment comfort zone.

Buy and Hold Strategy

In 1984, tech companies were the leading sector of a great bull market. If you bought the seven biggest US computer companies at that time and held for ten years you would have lost money in all of them.

When a stock is up, we know all the reasons why and it feels good and evokes feelings of grandiosity in all who own it. So it feels 100% counter intuitive to sell it. When a stock is being hammered there is plenty of bad news so you are more likely to sell.

Unless there is a stock market panic, the external environment creates no urgency to sell. At the race track, your bets are lost at the end of each race. On the share market the race is continuous, only pausing overnight. Owning a dog stock is like staying with an old nag in an endless race, even though it has fallen far behind the field.

Analysis Paralysis

Although there is so much data available, we never feel fully informed so we are always seeking more information in hopes of unlocking the final piece of the puzzle. But the fundamentals are continuously changing and the information is always historical and therefore backward-looking. This doesn’t stop us from buying because of the optimism and persuasion I’ve already mentioned.

Cognitive Dissonance

We own a stock because we have formed a positive set of images and expectations about that stock. Selling requires us to process new negative information and accept it to the extent of internalizing a complete rejection of our previous thinking. It also requires putting aside some contrary current positive factors.

We see selling advice as a direct attack on our shares. We tend to filter out bad news when it is about our own stock, or we twist the news to serve our prejudice.

In order to sell well, we must do something that seems illogical – sell when everyone else loves the stock and all the news is positive. It means parting with something you have treasured and which has treated you well. The longer the holding period, the greater the pain.

People resist selling what they own. When a stock is a winner, the bond is even stronger. We start talking about our stock as if it was a pet or a family member “my MacDonalds”, “our Microsofts.” Affiliation with a winning stock gives us reflected glory. We should consider all our stocks to be cash pretending to be a stock. This might help stop us from falling in love with our stocks.

Selling, subconsciously, means coming to a closure. In life, closure is usually a sad thing – leaving school, cleaning out the room of a loved one. Selling ends the chance to reverse the loss (and we will be reminded of that loss when tax time comes around).

Selling raises the need to make another buying decision which may not be so successful.

Two tips to help you sell

• Before buying, set a clear price target (P), driven by a scenario (S) and a time frame (T). Put this in writing and refer to these three points whenever you check your stock.
• Apply a regular test to every holding. Ask yourself “If I had extra cash, would I buy more of this stock at its current price?” If not, you should sell it. Holding on is just redeploying capital without paying a sales commission. If you wouldn’t buy at the current price, you should not hold.