Monday, December 18, 2017

The Curious Way People Think

The last posting referred to the use of SeekingAlpha as a way to publish postings on stock investment. Frequently, that will be the case. However, I've noticed a curious aspect to the interest of readers on SeekingAlpha. On October 26, 2017, a posting entitled “Let Your Winners Run” discussed some general principles related to how to maximize one's return from stock investments.

It noted that one can't go broke taking a profit, but one can under-perform the market. The reason is quite simple: every stock won't be a winner, so it makes sense to maximize the size of the winners. The posting noted that the share of stocks that are big winners is quite small, and, consequently, an investor should hold onto those winners. They are few and far between. It explains how the small number of big winners among all stocks and the presence of the phenomena known as persistence of a rising stock price support the argument for holding onto winners. It also discussed the implications of data on the trading practices of the large number of individual investors as well as research into how people react to gains and losses.

In short, it provided general portfolio management advice that works, and it explains why it works. That posting was followed by a posting on December 15, 2017, entitled “Let Hitters Swing For The Fence." That second posting did nothing more than take a number of examples, three to be exact, and explained why the strategy of “letting winners run” will probably work with respect to those three stocks. The three stocks were Boeing, McDonald's, and 3M. The only general portfolio management discussion concerned a common approach to managing concentration risk: Frequently, there are references to not letting any particular stock represent more than 5% of one's holdings. In discussing those three stocks, the posting made the point that while 5% is a reasonable target for a maximum portfolio weight, it shouldn't automatically imply selling winners.

Now, here's what I find so curious. More than twice as many people read the posting that addressed how to manage positions in only three stocks as read the posting that discussed the general principle that applies to all stock holdings. The question is: Does that imply that investors are more focused on individual gains and losses from a specific holding than how to improve their overall portfolio performance?

That could be a totally new dimension to the interpretation of behavioral economic and psychological research regarding how people feel gains and losses. It raises the interesting question of whether, from a psychological perspective, people derive more gratification or pain from small changes that result from their actions than from far more massive changes that result from intentional inaction.

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