Psychology And Bad Market Timing.

Every stock investor whether a technical or fundamental or value investor ultimately needs to take a call on whether he/she wishes to buy or sell at the price Mr. Market sets at any given time.How much an investment ultimately nets a person depends on the timing of the buy and sell decision and the actual price at which the transaction takes place,despite all the theories of averaging out and time in the market and reversion to the mean.

The following is a checklist of mental mistakes that may affect a person’s decision to buy or sell and cost a him/her dearly. The checklist is from Whitney Tilson’s presentation ‘How to Avoid – and Profit From – Manias,Bubbles and Investor Irrationality”

•Failing to Buy

–Status quo bias

–Regret aversion

–Choice paralysis

–Information overload

–Hope that stock will go down further (extrapolating recent past into the future; greed) or return to previous cheaper price (anchoring)

–Regret at not buying earlier (if stock has risen)

•Office Depot at $8 (vs. $6)

•Failing to Sell

–Status quo bias

–Regret aversion

–Information overload

–Endowment effect

–Vivid recent evidence (if stock has been rising)

–Don’t want to sell at a loss (if stock has been falling)

–If I didn’t own it, would I buy it? Or, If the stock dropped 25%, would I enthusiastically buy more?

While I’m not convinced that it’s possible for humans to avoid these mental mistakes altogether,I think it’s possible to control them to an extent by frequently reminding ourselves of these problems.So, do use this checklist just before buying or selling stocks ,or when you’re thinking about doing so and before evaluating your portfolio.The proximity of the 2 actions should help controlling the mental biases.