MORE THAN WEED,
cocaine orcrystal meth
, love is the ultimate drug. No other human emotion is capable of so effortlessly elevating your heart above the clouds or dragging it through the thorns of despair. Love is a powerful, uncontrollable, and in most cases, a dangerous force. Sometimes I wonder if life wouldn't be a lot easier without it.
The problem is that falling in love is easy. It doesn't take much energy or critical thinking to quickly find oneself completely head-over-heels for a beautiful girl. The attraction is usually immediate and irresistible: Without warning, she becomes the sun who brightens up your entire world. In your mind, you quickly make plans to share a future and can't imagine another day without her by your side. That's love. And that's where the trouble begins.
Love is equally as hazardous when it comes to your investments, where we often find ourselves falling for a particular stock and, thus, utterly devoid of the rational objectiveness that's required to successfully manage a position or portfolio. Love in relationships can break your heart, but love in your finances will devastate your bottom line.
How do we fall in love with a stock? Sometimes we're attracted by the profits an issue has provided over the years. For example, after rising many hundreds of percent during the 1990s tech boom, many investors couldn't fathom the thought of selling Dell, Cisco Systems or Intel simply because the stocks have become almost members of their family, reliably churning out double-digit gains year after year. A winning stock, especially one held for a number of years, can be quite difficult to divorce oneself from even when the market's price action suggests it's time to bid farewell.
Oftentimes, we're attached to the personal history behind a particular investment. So if your late father or dead great aunt left you 500 shares of General Electric, you might be hesitant to exit the position out of respect for the deceased. The stock becomes a proxy for the real-life feelings for the individuals involved. Of course, it was the money they wanted you to have, not necessarily the shares in any one particular stock. Yet we personify them into a scrap of paper which might not have the same investment merit as when it was purchased 10 years back. My own grandmother gave me shares of Ford Motor back in 1987. Considering the shares have fallen back near those late 1980s levels, I'm thankful to have long since exited the trade.
Most commonly, however, we're in love with the idea of a particular stock the fundamental rationale behind an investment which is often completely divorced from the actual price action occurring in the market. For example, for much of the last five years, patient investors have held onto shares of big pharmaceuticals like Merck and Pfizer because they were convinced the demographic "graying" of America would result in greater demand for prescription health care. And while demand for health care has grown, shares of two of the biggest players in the sector have fallen sharply for a myriad of legal and development-related issues. When we fall in love with an investment idea, we become preoccupied with believing a trade should work even when it isn't. We hold onto hope even in the face of a rapidly weakening stock price.
And while it's easy to fall in love, extracting yourself from its powerful grip can be an immensely difficult process. Although stocks are simply pieces of paper, we feel an emotional attachment to them that transcends a simple financial transaction. In most cases, we've not only invested our money into XYZ, but we've devoted our time as well. When you're in love with a stock, you've likely pored over the annual reports, listened intently to quarterly conference calls and dug through the company's financial statements.
Moreover, assuming it's a well-known issue, we are reminded of the company at every turn, seeing it mentioned in magazines, on financial TV programs and all over Internet message boards. You can easily avoid taking calls from your ex-lover, but ubiquitous names like Nokia or Boeing are usually harder to avoid.
Because love should be a selfish act, the best relationships are those in which the parties put themselves first. Unrequited love isn't love at all, and if a relationship, be it with a person or a stock, isn't serving your needs, try to rationally push yourself to cut the cord. Dow Chemical, for example, used to be a strong, well-known stock. Now it's weak, with little indication a reversal is imminent. From my perspective, it's an ideal time to kick it to the curb and move on to another dance partner.
A loveless life is tough to achieve. But you should most certainly drive for a loveless investment routine. The market isn't a girlfriend or wife, and when it comes to the bottom line, it's your head that should give the orders, not your heart.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.>