Emotional investing is a bad idea

David MoonBlog

Shares of Apple Computer topped $100 a share this past week, eclipsing their previous high of $100.72 in September 2012.

Demonstrating an uncanny ability to forecast short-term price movements, I sold my Apple shares in May this year for $85 per share.

In the interest of both full disclosure and self-defense, I should also note that I had purchased the Apple shares only 12 months earlier, for $64 share, producing a tidy 33 percent profit in only a year. Some people would argue, however, that by selling in May rather than August, I lost $15 a share.

They are badly wrong. Using that logic I also lost money by not owning Delta Air Lines (up 47 percent) this year.

But think of all the money I made this year by not owning Coach (down 34 percent) and Staples (down 29 percent.)

Kroger, however, doesn’t accept phantom or theoretical profits in payment for groceries. To actually spend my investment income I must actually have some.

Investors sometimes ask me why we sold a particular stock if its price was going to continue increase after selling it.

That question reminds me of Will Rogers’ advice to “buy some good stock and hold it ‘till it goes up, then sell it. If it don’t go up, don’t buy it.”

I suppose Rogers would also advise “if it don’t go down, don’t sell it.”

Wally Weitz manages the Weitz Value Fund and is a past recipient of Morningstar’s Fund Manager of the Year award. He is smart, accomplished and knows what he is doing. Weitz is a value investor who is only willing to buy and hold a stock if there is a comfortable margin between his estimate of the value of the shares and their price.

“A lot of times we’ll buy something at a bargain price, then sell it as it reaches our estimate of its value, which is often just about the time that the growth investors start moving into it—driving the price even higher,” Weitz explains.

Weitz also understands the unacceptable risks of owning or buying something for more than it is worth, even if the stock goes from being overpriced to significantly over-priced.

Stock prices will fluctuate around a company’s intrinsic value—sometimes below and other times above. When trading above its intrinsic value, the risks of owning a stock become enormous, even though there is a chance the stock price continues to increase.

Never underestimate how long a herd is willing to act irrationally. Guessing when irrationality might end isn’t investing; it’s playing musical chairs.

Like greed and fear, regret is an emotion. Flipping a coin is a better investment strategy than any emotion that might inspire you. And it is certainly safer than monetary musical chairs.