Don’t Fall for the Safe Position Fallacy


People like to win and hate to lose.  Basic in the psychology of people who are investing is the idea that if you make money on a position, you have won, but if you lose money, you have lost.  You also see silly ideas like “You don’t lose money until you sell.”

“You don’t lose money until you sell.”  Bad advice.

I’ve found that I’m subject to the same impulses.  When I was younger, I used to sell a stock if I made a certain gain.  For example, I would sell if I made $1,000 so that I could “take a safe position or  “lock in the gain” and eliminate the risk of the position turning south and turning into a loss.  Because I was taking a gain, I had “won,” but if I let the money ride and the stock went back down, I would have “lost.”  Chock one up for the “w” column.  Nevermind that I had to put the money somewhere else and possibly take a loss there.  I was a winner.  This behavior meant that I sold my gainers and held onto my losers.

Because I didn’t want to take a loss, which would then mean that I would “lose,” I held onto the losers, waiting for them to at least get back to the price at which I bought them.   Sometimes I’d hold them and they’d continue on down until I finally sold them in despair or just stopped looking since they weren’t worth enough to sell and pay the commission. Sometimes they would go back up to where I bought in eventually after a year or two of waiting.  Then I would quickly sell because, according to my ludicrous logic, that way I didn’t lose any money.  I didn’t “lose” since I got out what I put into the stock.  Now, in reality, while I had the same amount of money, perhaps a year or three had passed. Those dollars didn’t buy as much as they did when I invested them, so I was still losing money. Even worse than the loss to inflation, however, was the loss of time. I lost the ability to grow my money over those two or three years in a good stock because I refused to sell a loser.  I just ended up even after that time period instead of seeing gains.

After a few years of doing this, selling winners and holding losers, I ended up with a portfolio of stocks I didn’t really want.  I’d sold the stocks that were doing well and probably continued to climb.  I held the bad ideas and the poorly run companies, selling them if they actually turned around just as they started doing well.

In investing, there is nothing as important as time.

If you’re a serious chess player, you know about something called “tempo.”  Controlling the tempo means that you get to choose your moves and your opponent needs to react to what you do.  This keeps him or her from being able to do things that you don’t like.  Someone set back on their heels all of the time can’t throw an effective punch.

Time in investing is important as well.  Investments grow with time, and you make the most during the years at the end when you have the most money.  Each year at the end can mean hundreds of thousands or even millions of dollars in additional wealth.  At the beginning, when you first start investing, it may seem like you have all of the time in the world, so waiting for a stock to turn around doesn’t matter.  Waiting to start investing is even worse.   When you’re young and have fifty years ahead of you, you’ll figure it won’t matter if you wait five years to start investing.  You’re wrong.  At the end, you’ll wish you had just five more years before retirement.

Selling your winners early costs time.  Plus, you’ll still need to put that money somewhere, so you really aren’t reducing risk

When you sell, you need somewhere to put that money.  If you leave it sitting on the sidelines, you are losing time.  You never know when the next huge run-up in stocks will come, and you don’t want to be sitting on the sidelines in cash when that happens.  Selling just because you have a gain may mean getting out of a great company just when they are starting a big climb and putting your money into a stock you don’t like as much.  You might also be buying a stock ready for a fall because it has just completed a big climb and become overbought.

Another strategy is to take a “safe position.”  Here you sell a few of your shares so that you now have gotten out all of the money you invested, leaving a little in case the stock continues to climb.  That leaves you needing to move the money you made “safe” somewhere else, putting it at risk again.  The other choice is to leave the money in cash and be losing money to inflation each year it is not invested.  Why leave a company that is doing well and perhaps you really like to buy into another one that you don’t like so much?

Holding your losers costs time.

Every year you sit holding onto losing positions for them to go back up to where you bought them is a year you could have invested in something that was growing.  There are times when a great stock will go through a sell-off, or a company will drop in price as they reorganize and wait for their industry to recover.  There are also times when the whole industry or the whole economy declines, causing some great stocks to go down in price. Oil producers are in just this position right now, the good and the bad.  These stocks should be held and perhaps your positions added to during the downturn.  This is different, however, than holding stock in a company that is performing poorly and will continue to perform badly, waiting for it to recover.

I did this with Cisco stock, holding from about the year 2000 through about 2012, waiting for it to recover and grow.  I eventually sold the stock I had bought for about $20 at $30 or so.  True, I made a 50% profit, but I should have seen my money double or even quadruple in that period of time.   I lost all of that time when I could have been invested in a growing company instead of an old, tired, bureaucratic company whose time has passed.

Churning is costly.

When you sell a winner, you need to pay brokerage commissions (both for the sale and for the purchase of something else).  You also need to pay taxes on the gain, perhaps at a rate of 25-40% when you include federal, state, and local taxes.  If you stay invested, the money rides tax deferred until you sell.  This means your money, even the money that would have been paid out in taxes, compounds.  Over a lifetime, this could be hundreds of thousands or millions of dollars.  (I use that phase a lot, don’t I.  This is a costly thing to get wrong.)

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Why the Young and the Old Should Oppose a $15 Minimum Wage

IMG_0123It seems like the idea of a $15 minimum wage just won’t die. As they like to do with these things, those who are pushing for a minimum wage hike won’t give up until it is enacted.  Once it is and all of the minimum wage jobs go away, as is very predictable, they’ll then say it was the fault of rich corporations.  Odd how they never take blame for the bad ideas.

Understand that the crowd pushing for the $15 minimum wage is the same people who unionized the auto industry and made is so people could never be fired, wages and benefits were high and fixed, and whether you were laid off or not depended only on your seniority – never your work quality or speed.  There was a time when people were sitting in a room for weeks at a time at the large auto manufacturing plants, playing cards, reading the paper, or just talking, because they could not be laid off. If there were no cars to be made, they just got paid to sit there.  Once all of the plants left Detroit and the place became a wasteland, just as those of us who can do math expected, the closings were blamed on bad moves by management and greedy executives.  Never were the absurd work rules and labor costs that exceeded the money being generated by the workers blamed for the plant closings.  No one mentioned the people paid to do nothing and the effect they had on the bottom line.

Now the same people who destroyed Detroit are trying to get the minimum wage raised to $15.  Understand they don’t really care about minimum wage earners.  They just want to see minimum wage increase since the union wages are tied to minimum wage.  If minimum wage earners get $15 per hour, they suddenly get $40 per hour.  If union workers get paid more, the unions get more money.   Some of that money goes to get Democratic officials elected, who then use the power of government to create more absurd work and pay rules.  It is a vicious, corrupt circle.

But maybe you think, “So what?  It would still be great to make $15 per hour.  Think of all that extra money.”

Realize that the company is only making a couple of dollars per hour off of each minimum wage worker.  The worker is making the majority of the wealth being created.  Companies just make a lot of money because they employ a lot of workers.   You could not raise wages to $15 per hour since the company isn’t making enough to cover those wages.  Maybe during the fast times, but not during the slow hours.  If you try to raise wages beyond what the workers are producing, one of two things could happen.  Something would need to happen since a company can’t keep paying out more in salaries than they are bringing in from customers.  In actuality, a combination of both would happen.  These are:

1.  Companies would cut back on workers until they were bringing in enough to pay the workers and generate a reasonable profit.

2.  Companies would raise prices to cover the salaries.

Cutting workers would mean cutting the number of people at a business during a given shift and leave more work for the people who remain to do.  This would mean companies would only keep the most capable workers – those who were able to do the additional work.  People who aren’t able to produce at a higher rate would be let go.  Technology would be used wherever possible to replace workers – expect to see a lot of self-service, phone apps, and kiosks.  Companies wouldn’t hire many young workers with no experience because they wouldn’t have the ability to have you learn on the job.  This would make it very difficult to find a summer job or even a first real job because almost all jobs would require experience and a really strong work ethic.  This is why young people should be against a raise in the minimum wage.

Old, retired people should be against this as well because of the second consequence, higher prices.  For those working, wages would rise if prices went up, so you’d need $15 to buy a burger and fries instead of $6, but you would be making $15 per hour.  Note you would still need to work about an hour to pay for a meal at a fast food restaurant – there would be no change in the amount of work needed to buy a given product since there would be no increase in your efficiency just because you were paid more.

Older people wouldn’t see an increase in wages since they were not working, however.  This means that the amount of money they had in their retirement savings, assuming it was in bank CDs as many people’s is, would effectively be cut in half.  People who are receiving money from a fixed annuity would also see their income drastically cut since they would be receiving the same number of dollars but those dollars would buy far less.

The effect would go far beyond fast food restaurants.  People in the healthcare industry include a lot of people currently making less than $15 per hour, so health care costs would soar.  Ditto for things like maid service and senior care, home repairs, services like cable TV, and even buying food at the grocery store.  You might still have $50,000 per year in income from savings and annuities, but it would buy what $25,000 buys now.  You would need to trade the hard work you did for so many years for far less.  Many of the hours of work you put in would simply be stolen.

So if you’re young or old, you should be opposing a minimum wage hike.  The only people it helps is the union bosses.  Everyone else loses their job or sees their savings evaporate.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

The Office Microwave – A Test of Capitalism

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This is a post I wrote a few years back.  I wanted to resurrect it for new blog readers since I enjoyed writing it so much.  –SI

While you may not realize it, if you work in a mid to large-sized office, you have been living in a Communist society.  This is not to say that your daily job functions involve distributing copies of Pravda, or that you are working for free.  From those readily available clothes you are wearing to that latte you had on your way into work, you spend the majority of your day enjoying the products of capitalism.

I’m talking about that 5-10 minutes of your day where you step from your office into the office break room.  It is then that you drop behind the red curtain.  For it is there that you encounter the office refrigerator and, that nemeses of the office manager, the office microwave.

Use of these items causes you to, perhaps unknowingly, enter into a communist collective of office property users.  The microwave is owned by everyone, and everyone is supposed to use it as needed but keep it clean.  Each takes according to their needs and gives according to their gifts.  If everyone were diligent of leaving it as they found it, there would be no problem.  Eventually though, someone cooks something uncovered, which spills or generally spreads food stuff all over the microwave, and then leaves without cleaning things up.  This will probably happen over time, but as the microwave becomes dirtier more people will feel justified in not cleaning up after themselves.

At first there may be a few people who get sick of the conditions and clean up the mess, but if this continues, those people (and it’s always the same people) will get tired of always being the ones.  There will be others who clean up their own messes, but don’t feel that they should need to clean up after others.  Eventually those who did shoulder more than their share of the cleaning load will stop cleaning and get their own microwaves or find another way to leave the collective.

One would think that living in an area with managers or professionals would mean a cleaner microwave, but this is probably not the case. In fact, many of those who have attained stature may decide that cleaning up is below their status. They may feel that the use of the microwave without cleaning up is one of their perks. After all, they are very busy on important things.

At this point there becomes a rapidly increasing quantity of food on the walls and ceiling of the microwave, after which only the most die-hard of users will continue to use the microwave.  Disease, famine, and death will follow.

This same scenario is right now playing out at offices around the country.  It does not need to be this way, however.  Capitalism, the process that built the great cities in America and brought prosperity to all of those who were willing to work for it can save even the office break room.  Here’s how.

Place a jar on the counter with instructions that those who use the microwave or refrigerator should pay a cleaning fee.  This can be a very small amount, perhaps 5-10 cents per day.  You could also just put a jar with the notice that it is for “donations to keep the break area clean”.  While the honor system will probably work for the collections, the cash raised should be kept with someone trustworthy in the office.

Each week, the amount raised should be posted in the break room next to the jar.  A notice should also be included that states that whomever cleans up the microwave (or the refrigerator) will receive the collections.

As time passes and the microwave gets filthier, the cash amount will build.  Some people, eager to get a clean microwave, may make extra donations.  Eventually it will be enough, maybe $20 or $40, to entice someone to do the work and collect the proceeds.  At that point the microwave gets cleaned, the person holding the money checks to make sure the job is done well, the worker is paid the reward, and the process starts again.

Eventually people may start cleaning the microwave sooner in order to claim the prize, so the price will drop and the frequency will increase.  It may even become a game to see who can swoop in at the right moment to collect the money.

If instead of following the communist system, which will lead to substandard conditions, feelings of resentment, and eventual threats to get people to clean up, let the capitalist system work.  Have people pay for the service of having the microwave cleaned and have someone collect a fair reward for doing the work.  Everyone will be happy.  Or you could continue with a system that has failed at offices across the country.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.