The decision to not act

by Manshu on June 16, 2009

in Opinion

Post image for The decision to not act
Indecision by Xurri

Mark at Options for Rookies says:

“If you have a profit, that profit is yours.  It does not belong to ‘the house.’  If the investment turns against you, and your $1,000 profit becomes a $600 profit, you lost $400.

I can hear the disbelief now.  “How can I have lost $400 when I earned a $600 profit?”…. Holding is a decision.  It’s a decision not to act.  Because you can exit the trade at it’s current price, that price represent the value of your trade.  This is marking to the market.”

I believe this to be true, but I have always had difficulty in practicing this. I think I have not been able to practice it because of two reasons:

  1. Greed: When I am sitting on a big profit, my thoughts have nothing to do with booking that profit, instead, I day dream about how much further it will grow. When it’s a thousand, I think it’s only a matter of time till it goes to a couple of thousand, and then I will act. When it reaches two thousand, I wait till three and so on. Eventually, the profit starts coming down, and somewhere along the fall; reality hits. And I sell. I sell at a profit, but as Mark says — it’s really a loss.
  2. Cushion: Green is a wonderful color. When I see my portfolio in the green, I don’t worry about it too much. It makes me complacent and a little lazy. There is a sort of mental cushion that makes me feel relaxed and it works against taking any action. While one part of me tells me that the stock is going to go up, the other part reinforces that feeling by saying that even if it goes down a few points, you still have cushion.

These two forces act together against booking profits.

There is a simple thing that I do to counter these forces somewhat. It’s called partial profit booking and I am sure everyone has heard of it. I sell half of my stock, when it doubles in price. That way, at least I have recovered my cost, and even if the stock price goes down, my brilliant green doesn’t turn into a bloody red.

This means that at many times I have not been able to take full advantage of a soaring stock, which triples or quadruples, but I have felt that it is better than doing nothing. I don’t do it always, especially with the stocks that I bought at the time of market crashes, and which I think were very cheap when I bought them.

It’s all quite subjective, so what’s good for me may not be good for you, but the central idea is that:

“Holding is a decision.  It’s a decision not to act.”

This is something that not many people think about and it’s a thought, worth a serious thought.

{ 5 comments… read them below or add one }

ctreit June 16, 2009 at 2:45 am

Cutting profits and letting losses run is usually the biggest problem for most investors for a number od reasons. Successful traders and investors pick losers probably as often as they pick winners, but when they make money they make real money to easily make up for the losses.

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Mark Wolfinger June 16, 2009 at 9:40 am

When you own stocks, profits are potentially unlimited. That’s one reason why it’s so difficult to exit (or partially exit) a winning trade. The lure of the huge gain is difficult to ignore. And as ctreit points out, the big money does not come from booking small profits.

But when trading options, my recommended strategies involve limited profits. When you’ve earned 80% (for example) of the maximum, it’s often foolish to hold, waiting for that last 20%.

But, neither of these points relates to the quote: When you own a position, if you do nothing today – that’s an investment decision. It’s reaching the conclusion that – at today’s prices – continuing to own the trade is a smart idea. You can sell, but you choose not to do so. That ‘hold’ decision is taking action – even though most investors consider it as ‘doing nothing.’

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thedumbinvestor July 8, 2009 at 7:52 am

Deciding when to sell is more difficult than deciding when to buy and I guess everyone employ a strategy that they are comfortable with and I don’t think we can say one is right and the other is wrong.

RK
http://thedumbinvestor.blogspot.com

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Manshu July 8, 2009 at 6:02 pm

@RK: Yeah, I have found it really really difficult to sell under a loss. The only exception to that is when I know for sure I have made a mistake or a scandal breaks out. Other than that, its really hard to decide that you want to sell.

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Forex October 19, 2009 at 3:08 pm

Greed: When I am sitting on a big profit, my thoughts have nothing to do with booking that profit, instead, I day dream about how much further it will grow. When it’s a thousand, I think it’s only a matter of time till it goes to a couple of thousand, and then I will act. When it reaches two thousand, I wait till three and so on – so r so right.. greed makes most of us blimd

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