Have you ever attended an event or been at a social gathering where someone you regard as smart and financially savvy says that they plan to invest in a stock simply with the hope or belief that it will or might go up in value? It may have caught you off guard!
While reading a post on Nasdaq’s online platform entitled Hope Is Not A Strategy, Before Investing Have A Precise Calculation Of Return In Mind, we came across the following illuminating passage:
“…there is a very popular mantra that states ‘Hope is not a strategy.’ Some attribute the origin of this mantra to former New York City Mayor Rudy Giuliani during his speech at the Republican National Convention on September 3, 2008, where he said, ‘because change is not a destination, just as hope is not a strategy.’ Others credit a well-publicised letter sent to Barack Obama by economist and Dean of the Business School at Webster University in St. Louis, Dr. Benjamin Ola Akande, that was titled ‘Hope is not a strategy.’”
Regardless of its origin, the phrase hope is not a strategy is profoundly applicable to common stock investing, and all investing for that matter. Prudent investing should always be implemented based on a well-thought-out plan and strategy for success. As the admired baseball legend Yogi Berra so aptly put it ‘if you don’t know where you’re going, you might wind up someplace else.’ Or perhaps better yet, Yogi also said ‘you’ve got to be very careful if you don’t know where you are going, because you might not get there.’”
A Strategy Defined
It comes down to having a strategy, which in the words of Russian economist Dr. Vladimir Kvint, is “a system of finding, formulating, and developing a doctrine that will ensure long-term success if followed faithfully.”
We’ve written with frequency about behavioural investing and, specifically, about so-called loss aversion, which is a pathology that – among other mistakes – inclines us to hold on to losing stocks for too long.
A recent edition of the online platform Behavioral economics referred to a syndrome called getevenitis, which was characterised by financial advisor LeRoy Gross as follows:
“Many clients, however, will not sell anything at a loss. They do not want to give up the hope of making money on a particular investment, or perhaps they want to get it even before they get out. The ‘getevenitis’ disease has probably wrought more destruction on investment portfolios than anything else.”
The problem with hope is that it’s a disposition, rather than simply an emotion. Emotions come and go. Hope tends to be a deep-seated psychological trait, that in some people is what drives them forward. It’s a state-of-mind.
4 Tips To Help Change Your Thinking
Later in the same article, the author asked the question: What can we do to improve our decisions? Well, here are some “pills” to alleviate the getevenitis disease:
- Financial knowledge: The more we know the basic truths and have knowledge of investments, the less likely it is that we’ll fall prey to gut feelings or emotions.
- Experience: The more experienced we become with investing, the more we’ll get used to the volatility of the stock market. As a result, we’ll be less likely to react emotionally to the ups and downs of stock prices.
- Counter-hope-thinking:If we’re encouraged to think about reasons why the price of the held stock is not going to bounce back, we’re more likely to accept the loss and sell the losing investment.
- Let others make the decision: Given that we might be too hopeful to sell our losing stocks, letting others make the decision could be a possible solution.