Never Marry a Stock

 

Date: 8/19/2022
Author: Chris Hood

 

 


I had a chat yesterday with my colleague Corey Snyder about stock ownership.

It got to the heart of why those who trade solely on company fundamentals can never seem to turn a consistent profit.

Much of the trading advice out there emphasizes this:

“Only trade companies you want to own because buying shares makes you part owner in the company.”

Every time I think about this, it makes me chuckle.

Here’s why.

Suppose you bought into AMZN and hold 100 shares purchased at $120.00 each. You like the company, and at $12,000.00, this is a sizable portion of your account.

Do you expect them to listen to you at a shareholder’s meeting?

Think you might draw a salary from the company?

Considering that AMZN has 10.19 billion shares outstanding, with approximately 10% held by company insiders and almost 60% in the hands of institutions, your 100 shares are entirely insignificant.

You’re still a nobody, even if you doubled or tripled this position.

Send a letter to the board of directors suggesting a new policy change for the company, and no one will bother reading it.

As traders, we may date a company but never marry it.



The only thing that matters is how the ticker is moving. If your indicators suggest a price increase, then buying long stock or starting a bullish options position makes sense.

Likewise, if it predicts falling prices, selling shares short or making bearish options trades is the way to go.

You can make some poor decisions when you get caught up in your supposed “ownership” of the company. Social psychologists refer to this as confirmation bias.

When people make decisions, they will likely validate their choices and become even more committed.

No one likes being wrong.

For example, when you buy a new car, chances are you’ll start to like it more and defend it against any criticism.

You’re justifying your purchase to yourself.

There’s a heavy burden on you to justify your decision when you’ve gone all in.

Think about this with your trading positions and the illusion of ownership. Whether your trades are shares or options, it’s easy to become emotionally invested in a company.

Want to know what happens then?

They become too bullish for their own good, riding losing positions for far too long because they’re confident the company will recover.

Please stop this nonsense.

A company’s value is what others are willing to pay for it. Period.

All the information you need is priced into the tape, so get your indicators working and trade based on your rules.

What you believe will happen is of no consequence. You cannot control the ticker with your hundred shares or 10 call contracts.

All you can do is follow your plan and stay on the right side of probability.

Trading is casual dating, not matrimony.

If the date isn’t going well, duck out the back door as quickly as possible.

 

Cheers,
Chris Hood


 

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