The psychology of selling winners too early
Introduction
When I ask fellow investors about their biggest mistake, it's nearly always "selling a winner too early." Myself included. At some point during our investing journey, we all seem to fall for it.
Which made me look into it more deeply, to understand the psychology behind it and prevent myself from falling into that trap again. For me, my biggest mistake was selling Tesla, which I invested in back in 2019.
The stock had a nice run, and I was up 350% on my position, so I sold, feeling like a genius. Only to see Tesla's stock take off in the years after. If I would've held, it would be a 25 bagger today.
The psychology
Selling winners too early comes down to prospect theory: losses feel roughly twice as painful as equivalent gains feel good. So the moment a position is up, your brain can flip into protection mode.
Then there's regret aversion. Watching a winner keep climbing after you sold it feels like failure, and the brain hates that more than missing the gain itself. So it takes the easy route: lock in the win, feel smart, move on, and don't look back.
I could be wrong about when the right exit is. We all can be. But I think the answer isn't willpower but structure. What has really worked well for me is defining my exit criteria before I buy, grounded in business fundamentals, not price relative to your cost basis. Price is not the thesis, the business is.
Doing so makes it easier to cut the weeds and water the flowers.
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And that concludes this week's newsletter. Thanks for reading, and have a wonderful day!
~ Jan
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