You know the market is reaching a critical point when folks can’t agree on it.
Recently, we’ve asked readers if they’re bearish or bullish. And an overwhelming number of folks think there’s still plenty of time for the market to keep running higher.
I’m not so sure.
But what concerns me the most is how emotional our readers seem lately. They’re passionate about their stance on the market and whether or not we’re making the right calls. We even have some folks outraged that here at Stansberry, many analysts disagree on where the market’s headed.
Don’t let those emotions cloud your judgment.
Today, I want to address a common emotional roadblock that leads to portfolio ruin.
Humans are prone to an emotional bias called the “endowment effect.” This phenomenon, also known as divestiture aversion, occurs when we place a higher value on something simply because we own it.
Richard Thaler, a pioneer in the field who won a Nobel Prize for his work, loved to show this concept with coffee mugs.
He’d offer to sell folks a generic coffee mug with a university logo on it, and the average price people would be willing to pay was $2.50. However, if he gave the mugs out for free and then tried to buy them back from people, they’d demand an average of $5.25.
Once it becomes “your” mug, it becomes a lot more valuable to you. We demand unreasonably high prices to give away the things we own.
Investors do this all the time…
Think of it this way… Let’s say you own shares of retail chain JC Penney (JCP) because you used to work there and received shares as a part of your annual bonus.
But your current portfolio consists of a mix of stocks that either pays a high dividend or has substantial growth potential.
JC Penney fits neither of those requirements. It hasn’t paid a dividend since April 2012. And it keeps losing money – in 2017, net sales were down.
But there are folks out there holding too much JC Penney stock because they value it more than a reasonable buyer would.
They’ve created a strange link between their identities and that stock.
One explanation is that the endowment effect increases your bargaining power when trading in small groups, giving you an evolutionary advantage. Therefore, we’ve all descended from ancestors with an endowment effect built into their brains.
Whatever the reason, it doesn’t help us today. We’ve all got a drawer full of junk just like that coffee mug worth at most $2.50.
Let’s purge the mugs from our portfolios.
A simple test can help you shake off the endowment effect: From our example above, let’s say you own $5,000 of JCP stock. What if overnight that $5,000 in stock turned into $5,000 cash. Now you have the cash sitting in your brokerage account and no longer own any shares.
You have the choice to either repurchase shares of JCP for the exact same price or use that $5,000 to invest in another stock.
Almost everyone would choose to invest that $5,000 elsewhere. Let’s face it – the S&P 500 includes probably 400 stocks you’d rather own than JC Penney. Even though when you owned the shares of JCP, you didn’t want to sell and buy something else.
Nothing happened to JC Penney overnight… The only thing that changed is your possessions.
No matter what happens to the market this year, you need to prepare. Mentally clear out your portfolio. Imagine selling everything and going to cash. Then review every investment as if you were deciding to buy it again.
That’s the way the market works, really. Everything you hold today you essentially decide to “buy” anew each and every day. You’ll do better to think that way as well.
If you want to set your portfolio up for success, you need to be prepared for a continued bull market or the inevitable bear market…
Tomorrow night, you’ll get a chance to see our favorite bulls and bears fight it out during the 2019 Bull vs. Bear Summit. You’ll hear from Melt Up King Steve Sjuggerud, perma-bear himself Dan Ferris, and my favorite mathematician, Dr. Richard Smith.
These guys are going to sit down with former hedge-fund managers and Wall Street insiders to discuss the fate of this clearly long-in-the tooth bull market for 2019 and beyond – and I’m excited to hear what they’re personally doing with their own money.
It’s completely free to attend. There is no obligation other than your time and a willingness to learn. But a reservation is required.
What We’re Reading…
- Something different: Is Facebook teetering close to China’s personal score system?
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
February 12, 2019