Ah! Finally, the stock price reached my ENTRY-LEVELS AFTER YEARS.
Have you ever experienced this feeling and situation before?
Investors who initially buy stocks based on herd mentality often find themselves in a unique predicament when their short-term trades unexpectedly transform into long-term investments.
This is what most of the investors are experiencing in the PSU and PSE stocks.
Driven by the fear of missing out (FOMO) and influenced by the crowd's enthusiasm, these investors may hastily jump into stocks, only to discover that they are now stuck with them for years. This unintended shift from short-term speculation to long-term commitment can lead to a range of psychological and financial challenges, as they navigate the complexities of holding onto investments that were never intended for the long haul.
This brings me to explore the psychological impact on long-term investors when their stocks finally reach the buying prices after holding them for 3-5-7-10 years.
Let's jump into the emotional journey, behavioural patterns, and decision-making processes of investors in such situations. The insights are derived from general market dynamics and investor behaviour.
Buy and HOPE
Long-term investing is a strategy where investors buy stocks with the intention of holding them for an extended period, often years, with the hope of realizing substantial capital gains.
The journey of long-term investing can be chaotic, and investors often face significant psychological challenges along the way.
One of these challenges is the psychological impact when stocks finally reach the buying prices after an extended period.
Patience and Anxiety
Long-term investors often exhibit patience and resilience during prolonged periods of underperformance. However, as the stock price approaches their initial buying price, anxiety may set in.
The fear of losing gains, also known as "loss aversion," can make investors uneasy about whether to sell or continue holding.
Investors may experience "regret aversion" as the stock price nears their buying price. They might recall missed opportunities to invest elsewhere or regret not selling earlier during the holding period when the stock's value was lower. This regret can lead to a sense of hesitation and indecision.
Anchoring bias is another psychological phenomenon where investors fixate on their initial buying price as a reference point.
When the stock price approaches this reference point, they may become overly focused on breaking even, even if the stock's fundamentals have improved significantly since their initial purchase.
Confirmation bias can lead investors to seek out information that supports their decision to hold or sell when the stock approaches the buying price.
They may ignore negative news and disproportionately emphasize positive information to validate their choice.
Case Study (Hypothetical)
Consider an investor who purchased shares of XYZ Inc. at Rs.50 per share. The stock went through a roller-coaster ride, hitting a low of Rs.15 per share before gradually climbing back to Rs.50 after 7 years. During this time, the investor experienced a range of emotions, including anxiety, regret, and anchoring bias.
Initially, the investor was optimistic about XYZ Inc.'s potential and believed in its long-term prospects. However, as the stock price approached Rs.50, the investor started questioning their decision to hold, fearing they had missed better opportunities elsewhere. They also clung to the notion of breaking even, even though the company's fundamentals had improved.
Ultimately, the investor decided to hold onto their XYZ Inc. shares, partly due to confirmation bias, as they selectively focused on positive news about the company's future growth prospects.
What Should an Investor Do?
Investors should maintain diversified portfolios to mitigate the psychological impact of a single stock underperformance.
Self-awareness of emotional reactions and biases when stock prices approach buying levels. Investors should seek professional advice when needed.
Emphasize the importance of a long-term perspective and the role of time in investment success. Highlight that short-term fluctuations are a natural part of the market.
Investors should stress-test their investment decisions by considering various scenarios, including the possibility of the stock never reaching their buying price again.
Investors should develop a clear exit strategy when their investments approach the buying price. This strategy should be based on a rational assessment of the stock's current fundamentals, technical and market conditions.
Long-term investors often face significant psychological challenges when their stocks finally reach their buying prices after holding them for years.
Understanding the emotional and behavioural aspects of such situations is crucial for investors to make informed decisions.
By promoting diversification, emotional awareness, and a long-term perspective, investors can better navigate the psychological impact of these scenarios and make more rational investment choices.