The perils of falling in love (with an investment)

Wise men say…

It’s easy to fall in love with one of your investments, especially if it has performed well for you to date.

Yet this may also be a trap.

After all, if you bought an asset or security because it appeared to offer good value at the time and its price has now gone up, could it be that what initially made it attractive no longer holds true?

Indeed, the time when you begin to fall in love with an investment might even be the time to consider getting out of it!

Money doesn’t care who owns it

Money & investments are impersonal beasts.

Of the myriad cognitive biases in financial markets, while it’s customary for investors to attribute successes to skill and failures to bad luck, perhaps even more common is falling in love with investments or ideas that aren’t worthy of affection.

The most important thing to realise is that an investment does not know who owns it; nor does it care (& therefore whether you love an investment or not, the feeling will never be reciprocated).

It probably doesn’t help that analysts issue so many more ‘buy’ or ‘overweight’ recommendations than ‘sell’ equivalents.

It seems to be particularly difficult for some analysts to reverse previous endorsements, so it may pay to take heed when negative guidance is given!

Love is only a feeling

When you own an investment, you can begin to attribute feelings to it based on all sorts of things that can be largely irrelevant to future returns (which friends you’ve told about it, what price you paid, whether the company has behaved in line with your personal ethics, and so on).

In the colourful world of real estate, I’ve noticed that a gamut of emotions can be attributed to properties that may contribute nothing at all to investment success.

For example, it may sound impressive to peers if you control a portfolio comprising multiple units, but if they’re dud investments then what the heck does it really matter how many you’ve bought? In some instances, less is more!

It’s also natural to garner affection for superficially attractive homes, whereas less than attractive shacks can often be stronger performers, particularly when there is the opportunity to add value through renovation/development, & when they sit atop highly sought after blocks of land.

Think like a Vulcan

Falling in love with investments can lead to a lack of open-mindedness, misplaced overconfidence, an unwillingness to sell or shift strategy, and ultimately, sub-optimal returns.

Although it’s difficult to do, try to be objective about your investments, and challenge whether you’d still willingly buy them today.

While it’s great to think positively, if you only seek to confirm your beliefs you’ll never find out if you’re wrong.

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