Turmoil in Financial Markets: decision-making bias in financial trades

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silmcoach
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Re: Turmoil in Financial Markets: over and out

Post by silmcoach »

As the Sydney ASX All Ordinaries market virtually collapses, losing nearly 10% by mid afternoon (Aus time), it's more than likely European, then the U.S. markets will bomb later today. I think it's time to bring this exercise to a close.

My conclusion is that Kahneman's hold-on-to-winners strategy is not a good strategy for all circumstances. I think you ignore gut feeling at your peril.

My gut feeling (as argued here) was to cash in when the markets peaked in February because prices did not reflect economic fundamentals. But I wanted to remain the objective experimenter testing the theory. In that rational frame of mind it seemed reasonable to buy back funds for less than I sold them as markets dipped. The problem was they kept on dipping. Now I'm spent up the markets continue to fall. All I can do now is hope that eventually the markets recover (could be a few years!).

Had I listened to my gut feeling I would have secured my gains selling all my fund holdings, held cash, waited for the worst of the crisis to be over, then reinvested in the final dip range.

So, we do have a slow system 1, and a fast system 2, but we have to remain flexible and alert to risk, ready to respond in a flash when necessary.

RESULTS:

Stocks sold November 2019 £1,944 (gain £250 including cash dividends). Had I held on to these winners I would have lost £273 on them by 8 a.m. today.
Remaining stocks held since November 2019 £1,304, current loss £189.
Stocks purchased during recent market falls to date £4,037

Total current holdings £5,341 showing a loss on paper of £381.

Had I held onto all my winners (instead of selling some) the total loss this morning on £3,248 invested would have been - £462
But by selling winners for a £250 gain, then buying them back at a lower price, (and increasing my holdings to £5,341), my total loss of £381 is reduced by the £250 gain, so a net loss of £131.

I am therefore £331 better off by having sold winners.

CONCLUSION: Selling winners was a better strategy than hanging on to winners.
[Caveat: Stocks look like falling another 10% today, so these figures are provisional]
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
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Posts: 236
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
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Re: Turmoil in Financial Markets: Update Friday 13th

Post by silmcoach »

Update: Close of business Thurs 12th.

Markets did fall 10%

Stocks sold November 2019 £1,944 (gain £250 including cash dividends). Had I held on to these winners I would have lost -£387 on them by 8 a.m. today.
Remaining stocks held since November 2019 £1,304, current loss -£261.32.
Stocks purchased during recent market falls to date £4,037

Total current holdings £5,099 showing a loss on paper of £623.

Had I held onto all my winners (instead of selling some) the total loss this morning on £3,248 invested would have been - £648
But by selling winners for a £250 gain, then buying them back at a lower price, (and increasing my holdings to £5,341), my loss of £623 is reduced by the £250 gain, so a net loss of £373.

I am still £275 better off by having sold winners, then buying back when the price fell.

Believe it or not I did place three fund buy orders of £100 each for noon valuation today, mad or what? Topping up my three best winning funds while prices are low. My gut feeling (uh, uh) is that we will survive the coronavirus pandemic and the markets will rebound. There was a bit of a bounce on opening after yesterday's greatest fall since 1987, but some commentators say it's a dead cat bounce, and that the markets will continue to fall. So, all I can do is hope.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 236
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
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Re: Turmoil in Financial Markets: time to reflect

Post by silmcoach »

Early to bed last night, so early to rise.

Is this the end of the world as we know it? So go the words of the song.

Hopefully not, but certainly challenging times ahead. Kahneman's hold-on-to-winners strategy is intended to override an innate aversion to loss. In this experiment that may prove to be an expensive mistake.

By religiously sticking to the logical strategy I reasoned buy back into the market as prices fell. Shutting off my fast system two and the fear response blinded me to the fact that I was actually risking losing my entire investment.

That fear is apparent in my earlier posts, but was dissipated when I forced myself to remain the objective experimenter.

The lesson learned is that you should always remain flexible, ready to adapt to change. There's a good reason for having a slow system one and a fast system two, ready to respond in a flash. I should have listened, sold my entire stock holding as my gut told me, and waited longer for the dip to bottom out. It's easy to be wise after the event. The only resource left is patience. The markets will recover in time.
silmcoach
Greatest wealth - happy heart, peace of mind :D

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