Rational and Reasonable

This topic was quite an interesting thing to go through when I was reading the book 'The Psychology of Money' by Morgan Housel. Well, I won't quote what was actually written in the book, but here I present a brief summary of the same. 

Imagine you buy a stock based on a reputed broker's advice. Even better, you make the investment based on your own research and data analysis. You get to know everything about a particular stock. The company, the business model, the investors, the promoters- all and everything. All of this gives you enough conviction and confidence to go for the stock. The stock meets all the metrics for being an investable company. Everything looks cool, and you just can't wait to have the stock in your portfolio. 

You buy it. Just right then, the stock starts to go down. It tanks day after day. Your investment loses value by approximately 15% within three weeks. The stock is still above the metrics that you used to measure it before investment. But suddenly, you feel you made a mistake by investing in it. You feel you may lose all of it. Why? 

You don't want to see your investment go dark red each passing day. You don't want to be ridiculed by your friends for being bad at choosing a good company to invest in. You don't want to feel the stress of having to see your stock moving down or sideways for a prolonged period. Even though the stock is fundamentally good, you will only think of all the negativities of that stock. You feel you may lose more money. Even though, the stock is fundamentally good, and charts indicate a possible upward movement. 

The confidence and conviction are gone now. What's the rational thing to do when a fundamentally strong stock is going down? Buy more... but no! You won't buy more; instead, you want to get rid of it. All your research and analysis don't convince your mind to hold. Your mind says, "This investment wiped out 15% of my money; all my friends laugh at me for investing and losing money on this stock." Things like these emotional imbalances are enough to convince you to sell the stock. What you had before investing was a rational mind; it didn't have pressure back then; the stock looked so cool to buy. After investing, every other thing bothers you. Research and charts aren't enough. Because your journey with the stock for the past three weeks gave a terrible portfolio outlook. So, to cool your mental state, you think of selling the stock for a 15% loss. Right now, all you want to do is book a loss at 15% rather than see it go down by 20% or 30% or even more. The buying involved a rational decision. But all the trauma for three weeks makes it a reasonable thing to sell it now. Instead of making a profit out of it, you just want to avoid further losses. This is what reasonableness is. Rationally speaking the stock is good to buy even more, but it is Reasonable at the given moment to sell it right now.

The lesson here is simple: decisions regarding investment don't involve just research, charts, and analysis. It goes deep into the psychological level. It is harder to handle our emotional self for the conduct. Our emotions play all sorts of things, and overcoming that is a mammoth task. We are all humans, emotional beings. Emotions overpower most of our decisions. To have a rational conviction no matter what the world says about the stock is something we all desire. 

Investing doesn't just involve study and analysis; it mainly involves handling your mental state of being. How well you conduct yourself in the situation of mental turmoil matters more than your research. You may have the skills, but without a balanced and calm mind, you couldn't make much through investment.

Till we meet next time here, Bye-bye.

Hare Krishna.