I am not a big investor, heck I am not even a small investor, but I like to believe that if I were one, my decisions on when to invest and when to bail, would be a lot more logical. Sure, I understand that investment decisions are not always about logic, sometimes they are about how one feels about an investment, it sort of becomes "personal" for most investors.
But here is one thing I never understood. Someone buys a stock at $10 a share. They hold it for 5 years, and then something happens and the stock tanks within a very short period of time, let's say within a couple of months. SO, the peron finds themselves holding a stock that paif $10 for, being worth only $0.75. So what should thry do?
(a) for most of them, it's hard to seel it, because that's like admitting failure and and giving up hope that the stock may go up again (all humans need to have that hope).
(b) some rationalize that they have to seel it so that they can at least write off all the losses from their investment (though deep inside, they are sad they are selling it, because they are giving up on the hope of the stock coming back up).
Why couldn't they think about logically and,
(1) Sell the stock for $0.75, this way taking the full loss write-off and,
(2) taking the proceeds of teh sale and purchasing "SIMILAR" stock (one that was about $10 and has lost its value being about $0.75 now).
The get the best of both worlds. They get the write-off ans still have a stock that may perform well, if the economy recovers, thus making a profit.
What am I missing here?
