Be careful where you invest your love…

Valentine’s Day, a day for celebrating love, albeit slightly contrived and infiltrated by the reach of commercialisation that permeates all walks of life. They say love is the most powerful emotion of all, therefore it is no surprise that the word is used so much in the financial markets. Turn on CNBC and you’ll hear the talking heads waxing lyrical about the ‘stocks they love’.

Ultimately, the stock market is simply a reflection of the collective opinions of market participants, often driven by emotion, at a point in time. Hence, when the share price of a company is flying high and assigned eye popping valuations we hear about why ‘the market loves these stocks’.

However, as is the case in real life, love can also be fleeting in the financial markets. Just ask the shareholders of the likes of Twitter Inc. (TWTR), Go Pro (GRPO), Fitbit (FIT), 3D Systems (DDD). Once much loved market darlings, the share prices of these technology companies have declined in the order of 70%-90% from peak values reached over the last two years.

Take 3D Systems for example, a company at the forefront of 3D technology. After languishing for a number of years, the stock went from around $10 a share in early 2012 to a peak of $97 in December 2014, as investors fell in love with the idea of 3D printing and 3D Systems. Love appeared to have no limits for the prospects of this company as the share price surged ahead over that period. However, since then the stock has fallen over 90%, eroding all of the gains of the previous two years.

There is an old Wall Street adage, ‘Never fall in love with a stock’, a piece of advice I remember hearing from one of the veterans of the Merrill Lynch San Diego office, ‘the stock guy’, I worked with in the early days of my career. The meaning being that some investors can become so emotionally connected to a stock they miss the opportunity to sell before large declines are incurred.

In Ireland we saw how investors fell head over heels with bank shares, so much so that they could not believe the warnings when share prices were on the way down. Working in Davy Private Clients in 2008 I witnessed first-hand just how obsessed portfolio managers and clients had become with bank shares. There will be some long term shareholders at the banks who held shares all the way up to the record highs and all the way down to the record lows.

As I am aware, becoming attached to a stock, or any other investment, is just one of the reasons investors hold on too long.  Greed, apathy, fear, and an aversion to taking a loss are some of the others. In the investment world, the only way to deal with these behavioural biases, is to have a clear sell discipline, a process for making more informed decisions, less influenced by emotion.

If the market environment changes, you have to be willing to adapt, even if it means taking a loss. The alternative is pursuing a strategy of hope. A quote from the 1923 Wall Street classic, “Reminiscences of a Stock Operator” by Jess Livermore, sums it up well, “Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul.”

Of course, being that it is Valentine’s Day, I’ll end on a line from one my favourite bands, Mumford & Sons, a reminder of the biggest investment we make in our lives: “where you invest your love, you invest your life”.