You do not have to be a beginner at investing to succumb to that kind of irrational behavior. He had been a broker on the stock exchange floor for many years. Like my father, he had sold his interest in a family business during the 1920s and then invested the proceeds in the stock market. At the bottom in 1932, every stock in his portfolio but one was selling below what he had paid for it-in most cases far below his cost. In fear of losing the one profit that remained, he sold the IBM in December 1932.
Investors look at the hole more often than they look at the doughnut.
More important, investors tend to measure their wealth, not by its level but by where it is compared to where it has been. My client's decision to liquidate the IBM was motivated by where it was selling relative to what it had cost him, and in the process he ignored what a screaming value it was at that deeply depressed price. When I look back on the days when I managed other people's money, I can recall many clients during bull markets who thanked me for the way that I was making them richer. I always reminded them that they were thanking the wrong person. Their gratitude was due instead to all those other nice investors out there who were willing to pay higher prices for their assets than we had paid when we acquired them.