Most investors are, or will become, familiar with the experience of owning a share that makes them queasy. They may think it has great potential, but something niggles them about it – sometimes something quite hard to pin down. I have been thinking about this lately and something billionaire Warren Buffett said is helping me as I do so.
Simple but powerful
That quote is: “When forced to choose, I will not trade even a night’s sleep for the chance of extra profits”.
What does he mean by this? First notice that Buffett is imagining a situation where he has a choice.
Sometimes, for whatever reason, we own a share that does worse than expected but do not feel we really have much choice about selling it. Sometimes people decide to hang onto a share out of actual obligation, or a sense of obligation because they do not want to sell at a loss.
That can be a mistake: putting off turning a big paper loss into an actual loss can have a big opportunity cost. Indeed, that is exactly what Warren Buffett did after buying Berkshire Hathaway, then a floundering textile business.
But the bigger point in this quotation is about risk tolerance. How much extra risk ought to be taken in order to gain extra possible reward? Buffett’s answer is simple: not so much that it stops him sleeping, even once. But I think it is brilliant.
Applying this advice in real life
That might sound like a metaphor, but I think Buffett is talking literally. Most people have been kept awake at night at one point or another by something that is worrying them. That can include concern about an investment — and can be a real problem.
For several years, I owned shares in retailer boohoo (LSE:DEBS). When I invested, boohoo had run into some problems. I should have paid more attention to them. As Buffett also says, there is rarely only one cockroach in a kitchen.
But I was attracted by its previous success. It had a proven business model, had been very profitable and had a large customer base.
But over time, the boohoo share price fell and fell.
I hung on, hoping for recovery. It may still come. The retailer owns some popular brands and has been taking steps to try and turn around its business.
However, each time I looked at my boohoo holding again I was getting more concerned about the long-term direction of the business. That was not yet keeping me awake at night. But it did concern me whenever I thought about it in detail and I decided to sell my boohoo shares and cut my losses.
Investing and emotions don’t mix well
That was not a pleasing thing to do. But it did mean that I never got to the stage of losing sleep over my boohoo shares.
Like Buffett, I try to keep my emotions from damaging my investing decisions. I would rather get a good night’s sleep, even if it means missing out on some more potential rewards.
