Victor Preston Foundation

  Investors often hold losing stocks for extended periods of time and sell winning stocks too early (1). At best, this reduces gains. At worst, this results in large losses. Loss aversion is a psychological bias that can result in irrational behavior (2,3) . For many people , the pain of loss is much more intense than the pleasure of gains. In fact, it takes approximately twice as much of a gain to offset the pain of a loss. For example, many people would say they are indifferent between losing ten dollars and gaining twenty dollars. If people were rational, losing ten dollars would be perfectly offset by gaining ten dollars. In the stock market, people often hold declining stocks to avoid realizing loses. These people find the unrealized paper loss more palatable than a realized loss. These individuals hope the stock will rebound so they can avoid the pain of a loss. If the stock price decline is due to poor current and projected earnings, holding th e stock simply to avoid t...

                                                                 Image created by ChatGPT Jesse Livermore was a stock trader who made and lost multiple fortunes. Stating his life was tumultuous is an understatement. His stock trading method was discussed in the book “How to Trade in Stocks” (1). His method appears to have primarily been price trend following. There is also a brief reference to analysis of a business’s competitive advantage. The book is an interesting read, providing a glimpse of his life and stock trading. One mathematical concept discussed in the book is the Livermore Loss Table. Livermore points out that a loss of 10% in stock price requires only slightly more than a 10% gain in order to return to break-even. However, losses greater than 10% require increasingly asymmetrically gains to return to break-e...

                                                               Image created by ChatGPT The stock market can be intimidating. If you find it unpredictable and irrational at times, you’re right! It moves up and down based on past company performance, expectations about future company performance, buyer/seller emotions, and external pressures. Bubbles develop (stock prices reach overly high values) when investors are emotionally exuberant. Bubbles pop (stocks prices fall, sometimes to unjustifiably low values) when investors become overly pessimistic. However, over the long run, the stock market tends to price stocks fairly. The market has been volatile and pessimistic lately. Reviewing the work of Benjamin Graham, one of Warren Buffett’s mentors, may be helpful. Graham’s approach: 1. Graham emphasized understanding the financi...