In theory, there is no difference between theory and practice. In practice, there is. ~Yogi Berra
Buy low, Hold tight and Sell high. This sentence covers the entirety of investing. However, even though the theory is simple, the practice isn’t. Why so?
I think this is because of the confluence of intelligence and emotions. Low and High are maybe the rational prices derived by us on an excel sheet. But Buy and Sell are leaps of faith; there is an emotional push to the action.
Let’s say I buy 100 shares of a company ABC at 500/- each on 1st April. What has happened in my mind is that I have researched about the company, invested time and efforts into building a thesis and then arrived at a buy decision. I am convinced of the possibility of growth of the company, of its competitive advantage and of its ability to deliver reasonable returns. Life is good and rosy.
On the 21st of April, the company reports a sluggish Jan-Mar quarter that passed, and the stock price starts falling. Momentum starts gathering, and it is falling daily such that on the 2nd of May, the stock price reads 420/- – A 20% fall in about 10 days.
What now? The quality of my investment performance from hereon is a result of my behaviour at this stage. Do I now sell the scrip to cut losses? Do I sit on my hands and hold? Do I buy more?
How I deal with one stock is possibly how I deal with all stocks.
How you spend your day is how you spend your life ~ Annie Dillard