Interesting conversation with the car wash lady yesterday. Obviously a J&J retiree. Worried about the FED rate increase. And, tells me her portfolio is heavy into J&J. I gently remind her of the FIVE PERCENT RULE (i.e., never more than 5% in ANYTHING ever). She tells me that the capital gains taxes would kill her!
Now there’s a “cognitive bias” in action. I have seen it before in my own family.
One can focus so much on the impact of taxes that one loses sight of the objective reality.
I have seen an elderly relative take a million bucks and make it into zip in less than five years. AND, not for lack of me trying to “help” them.
It was an 80 $ per share stock. 100k+ shares! Virtually all gain. So the proceeds would have been 680k. She was frozen by the thought of paying 120k in taxes. Instead, she rode it as spun crashed and burned into the countryside.
I tried sell half, sell quarter, or options. I drew pictures. I cited experts. I vcred an executive of the company talking about the fundamental change of the company from “widow & orphans” to a “high flying tech stock”. (What an idiot!)
The lesson is that 5% rule is for your own sanity.
The poor person cited above was offered an option strategy that would have preserved the gain at a modest cost. Like Fire Insurance for stock certificates. I paid attention during my time on the Street. Don’t fall in love with any thing!
Our self-imposed limits are the most devastating.
Young elephants are captured. A large rope secured to a huge treevis attached to one of the animal’s legs. Over time, the elephant learns it can’t break free and begins to struggle less. As the elephant becomes more docile, the massive rope around its leg is replaced with a dog’s leash. The elephant learned to be weak!
So, we can “train” ourselves into weakness.
When that weak muscle is our brain, we are in big trouble.