Why it’s so hard to run winners

Introducing the biggest foe in your investing career… yourself.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Ever taken profits on an investment at the slightest whiff of volatility only to see its share price soar higher a few days/weeks/months later? Don’t despair, most of us struggle to keep our fingers away from the ‘sell’ button, even when things seem to be going swimmingly. Here’s why.  

Know your enemy

The tendency of investors to sell their winners (and retain their losers) is what behavioural finance boffins call the disposition effect. It happens because we’re primed to do what makes us feel good and avoid things that cause regret.

The disposition effect has its roots in the work of psychologists Kahneman and Tversky. They believed most people looked on losses and gains differently. When faced with two options, we’re more likely pick the one presented in terms of potential gains over the one presented in terms of possible losses. 

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Here’s an example. If I were to give you the choice of a) winning £20 or b) winning £40 and then losing £20, what would you do? Research shows that people would pick the option a), simply because we’re hardwired to avoid the greater emotional impact caused by option b). By choosing the latter, we’d inadvertently make £40 our reference point. To then walk away with anything less would feel like a loss, even though the actual choice doesn’t matter — you get a crisp £20 note whichever option you go for.

It works the same way in investing. We’re far more likely to realise a small gain rather than hold on for a potentially far larger one because the pain we’d feel if the latter were to then reduce would be too great. Besides, a profit is a profit. It feels good to be right.

To make matters worse, we cling to losing stocks. After all, in addition to hurting financially, it would involve us acknowledging we’d made a mistake at some point in our selection process. 

The real kicker in all of this is that research has shown that the stocks sold by investors (the winners) tend to continue outperforming the losers they hang on to. 

To be clear: over a long enough time period, the disposition effect could seriously reduce your chances of achieving financial independence. So, knowing that we have a habit of behaving like this, what can we do to reduce our susceptibility to it?

Resist temptation

Start by ignoring your gains. Instead, focus on re-evaluating your winner. Was the company undervalued to begin with? While it now trades at fair value, that’s still no reason to sell if the story hasn’t changed. Even companies with seemingly inflated valuations can be worth sticking with if the future looks rosy. That’s why I remain invested — for now — in companies like Blue Prism and boohoo.com, despite both registering incredible share price gains over the last year.

Also consider the consequences of selling. Is it worth taking profit on a seemingly great company to reinvest in what might turn out to be a very average alternative? If it’s true that great investors hang out with great companies, why leave the party so soon?

Remember that successful investing is not about how many winners you own but how profitable they are. A few great stocks held for the long term can be far more rewarding than a portfolio full of average ones.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers owns shares in boohoo.com and Blue Prism. The Motley Fool UK has recommended boohoo.com. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

At a 52-week low but forecast to rise 73%! Is this growth share the FTSE’s top recovery play? 

This FTSE 100 growth share has taken an absolute beating over the past two years but Harvey Jones says the…

Read more »

Investing Articles

This FTSE 250 share offers a juicy 9.8% yield. Will it last?

This well-known FTSE 250 share has a percentage dividend yield approaching double digits. Should Christopher Ruane add the income share…

Read more »

Investing Articles

Is a £333,000 portfolio enough to retire and live off passive income?

A third of a million pounds can generate a serious amount of passive income, but relying on this sum alone…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing For Beginners

Why FTSE 100 investors should pay attention to ‘Liberation Day’

Jon Smith explains why the upcoming tariff announcement from across the pond could have an impact on the FTSE 100,…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Here’s why Nvidia stock fell 13% in March

The Nvidia stock price rise was looking unstoppable. Should investors now be wondering if the same might be true of…

Read more »

US Stock

It’s ISA deadline week! Here’s my 3-step game plan

Jon Smith tries to calm the hype around the last minute ISA rush to buy stocks and explains why he's…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

£10,000 invested in BAE Systems shares at Christmas is now worth…

BAE Systems shares have been surging in the FTSE 100 in 2025, driven higher by the wavering US commitment to…

Read more »

Investing Articles

Up 19% in 2 weeks, can the Tesla share price rebound further?

Tesla's first-quarter delivery numbers came out today. Will they help persuade our writer to invest his money at the current…

Read more »