Pennsylvania Investment Observer

Price versus Story

by Daniel J. Nestlerode

We are story-telling beings. Most of what we understand and accept is woven in a story that we easily recall. Stories are tales containing facts and opinions and agreements that we incorporate in order to give our explanations credibility. Nevertheless, our stories are not always correct. Then we create another story about the problem with the first story. It would seem that there is no way out of our understanding through stories.

Investing is another story. Just look at the plethora of financial journals, reports, magazines and on line services and you will note that there is even a profession called financial journalism. It even has its own television network CNBC, among others. Most of us buy and sell stocks because we understand or agree with the story that is being presented to us by our broker, investment advisor or market commentator or analyst. We take action because we believe the story and assess that a profitable situation is at hand. But, alas, the story is not always right. Several outcomes are possible after you buy the investment. And the story is more complicated because we are talking over time, weeks, months and even years. We might see the price rise, it might fall or it might do nothing. When we plug in time, the weeks, months and years, then we can see all of these outcomes depending on the point in time we measure how the investment has performed. Further, the price of the investment is independent of the story that led us to buy it in the first place. Stories, you see, exist in different domains than the price performance of the investment and they exist by totally different sets of rules.

Sorry for being so philosophical. If you have followed me so far, take solace because I am coming to the point. When you buy an investment, the only thing that matters is the performance of the price in the market place. The glue that keeps you in an investment when the price is going down is your understanding and commitment to the story about the investment. You invoke other stories, like staying the distance, or this is a long term investment or some other nonsense. And I too have been guilty of such story hypnosis. I just sold a great story stock and then learned another story that, if I had known first, would have prevented me from buying the stock in the first place. Fortunately, this is just one of many stocks in my portfolios, so the damage was not extensive. My pride got dented, however, and I am now a tad smarter.

The bottom line is this. No matter what the story that led you to an investment, you must constantly measure the results and when it starts to turn south, you must sell it before you lose either your stake or your profits. Don't marry the story or the stock. Every investment in the markets that you own should be for sale, as the price warrants. You can always make up a story to justify your actions.

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