Loss aversion

"The stock doesn't know you own it. It just sits there, it doesn't care what you paid, doesn't care that you own it or anything. So any feeling I have about the market is not reciprocated."

The stock doesn't know you own it. It just sits there, it doesn't care what you paid, doesn't care that you own it or anything. So any feeling I have about the market is not reciprocated.

Losing a dollar hurts psychologically more than twice as much as gaining one feels good: that's loss aversion, and it produces two opposite but related mistakes.

The first mistake is selling winning stocks too early, to "lock in" a profit before it can disappear - even when the business is still worth much more than what you'd pay today. The second is holding losing stocks too long, hoping to at least get back to the price you paid before selling - even when the facts that motivated the purchase have changed.

In both cases the decision is anchored to your cost basis, not to what the business is worth today. But the market doesn't know - and doesn't care - what you paid: that number exists only in your head, not on the company's balance sheet.

The antidote is to value every position in your portfolio as if you had to decide today, from scratch, whether to buy it at this price - regardless of what you paid for it in the past. If the answer is yes, keep it or buy more; if it's no, being up or down doesn't change the answer.