Last week, while I was reading Bill Barker's Investing Lesson in the July issue of Motley Fool Hidden Gems, I couldn't help but smile. After all, investing rationally and fighting one's emotions is a topic near and dear to my Foolish heart.
Bill's piece reminded me of a common mistake investors make when they let their pride and ego get in the way of their better judgment. No one likes a losing position, and it's human nature to hope against hope that the miraculous comeback is right around the corner. Sometimes, though, it isn't, or the corner is so far away it's hard to know it's even there.
Far too often, I've heard investors say, "I'm going to hold onto it at least until it breaks even. Then I'll dump it." And I've never understood the logic. Is it because our pride won't allow us to admit to a bad decision? If we hold a loser long enough and it finally gets back to even, then we haven't made a bad investment?
I'm sure that somewhere there's an investor in denial, still holding shares of Lucent Technologies
Or how about former darling, Red Hat
When it's time to rebalance your portfolio or when you're reevaluating your holdings, the past isn't the important issue. Whether you're sitting on a devastating loss or a massive profit, what's more important is the future. Where will your money perform the best next year? The year after? Those are the questions that really matter.
If holding a dog means losing out on a better potential investment next year, sell it -- face up to the loss -- and move the money into a better prospect. Your goal is future gains. Does it matter if those gains come from a dog that rebounds or a new holding that goes up? It shouldn't.
We can all take a lesson from the classic 1976 film, The Gumball Rally. (Whaddya mean you've never heard of it? Some of us are that old.)
The plot -- such as it is -- involves a secret, illegal auto rally across the country. But the scene that really sticks out in my memory -- which, until today, I never thought would be be relevant -- is when Franco, the stereotypical Italian, approaches his sports car and says to a companion, "And now my friend, the first-a rule of Italian driving." He rips off his rearview mirror and throws it out of the car. "What's-a behind me is not important."
Fool contributor Robert Sheard drives a car with several rearview mirrors, but he tries not to look in them too closely when evaluating his portfolio holdings. He's also the best-selling author of The Unemotional Investor and Money for Life.