The dangers of share ownership

I’ve just finished a chapter in Dan Ariely’s delightful book, Predictably Irrational, which discusses how we get attached to things we own, and tend to value those things more than an objective observer would. This attachment explains the proliferation of the 30-day money-back guarantee; we fail to anticipate how attached we will get to the big-screen TV once its in our living room. This over-valuation is furthermore dependent on the amount of work one has invested in it. If a person spends some time fixing up his car, he is likely to ask for a higher resale price, above and beyond the actual value added through his efforts.

This chapter has got me thinking about my own portfolio. I tend to hold stocks for the long-term, and also tend to put a lot of work into research before I pull the trigger. This may contribute to an attachment bias, where I am reluctant to part with my shares even at an over-valued price, or when my original thesis proves to be wrong. (Buffett himself has commented that he should have, but failed to, sell his Coke shares during the period when it was hugely over-valued in the 1990s.) Another contributing factor is that I know that I’ll have to do a lot of work to replace the liquidated position. Therefore, in practice, turnover of my portfolio tends to be dictated by the speed at which I can come up with new and more under-valued stocks to replace existing ones, which is to say, very very slowly. Maybe I should come up with a set of mechanical stop-loss/profit-taking rules to combat this tendency?