Hope, begging, blind faith, wishful thinking, etc. Whatever you want to call it, it deserves no place in your portfolio.
I’ve done my fair share of all the above, and it has never turned out well. I’m human and I make plenty of mistakes.
But hope should be cleared from your portfolio as soon as possible because what it really does is cause confusion and strong bias. Although I’m mainly referring to “hope” in this article, it is the same for other emotions and biases.
In Investing, Hope = Hopeless.
Even if you bought Apple (AAPL) and held it the past decade, you still went through the ups and downs, and in between those ups and downs, I’m sure there were plenty of times where hope creeped in.
Now, with Apple (AAPL) down from its highs, there are plenty of people who bought AAPL based on a friend’s advice or just from news, without any idea why it has dropped, and are now hoping that it can get back to where it was so they can recover some losses. Which direction Apple goes from here is a different discussion altogether.
I’ve bought my share of value traps and ended up hoping the business will recover, or convincing myself that it was due to the economy and that things would recover.
But what I learned is that I eventually made up for the losses via other investments.
Whatever the outcome, we will heed a prime rule of investing: You don’t have to make it back the way that you lost it. – Buffett
It’s hard to sell losers because you don’t want to confirm that you lost, but it’s better to sell out and put your money to work in a better investment opportunity.
Why hold onto something, hoping for a 30% increase to break even, when a solid company is available for you to take advantage of with a 30% upside?
How To Strengthen Your Portfolio
While hope is a killer for your portfolio, there are ways to strengthen it that do not require any valuation or detailed work.
It just requires honesty.
Look at each of your portfolio holdings and ask yourself why you are holding them.
As you go through your list, you’ll start to encounter emotions and messages from your brain trying to trick you into believing something that you know is not correct.
Don’t get fooled by those thoughts and biases.
In fact, here is a bias that I have fallen victim to several times:
When presented with information that goes against your viewpoints, you not only reject challengers, but double down on your original view.
Voters often view the candidate they support more favorably after the candidate is attacked by the other party. In investing, shareholders of companies facing heavy criticism often become fanatical, die-hard supporters for reasons totally unrelated to the company’s performance. – The Motley Fool
The cornerstone and strongest foundation as an investor is not your educational background or analytically abilities. It is simply understanding and acknowledging your behavior.
You don’t have to try to fix every behavioral flaw -- you just have to know where not to tread.
Instead of looking for success, make a list of how to fail instead – through sloth, envy, resentment, self-pity, entitlement, all the mental habits of self-defeat. Avoid these qualities and you will succeed. Tell me where I’m going to die, that is, so I don’t go there. – Charlie Munger