The father of value investing Benjamin Graham used to say that “the investor’s chief problem – and his worst enemy – is likely to be himself.” This interesting statement gives rise to the question: what determines the return of an investor?
Is it human behaviour or market fundamentals?
For decades proponents have put forward the idea that man is rational and can maximize his profit in an act of self-interest. The theories of behavioural finance, however, have refuted this idea, arguing that it is often difficult to control our feelings when investing. This is because as human beings, we are not wired for disciplined investing and are susceptible to certain trends and thoughts which unconsciously influence our decision making.
Now, with behavioural finance in mind, let’s dive into what exactly that means in the context of inherited stocks.
Coping with the loss of a loved one is undoubtedly one of life’s biggest challenges. And if you have inherited stocks from your loved one, it gets a little complicated – literally.
The passing of a loved one will be complicated by emotions. Emotions will be complicated by financial considerations.
Do you choose to honour the memory of your loved one or look for long term financial benefits?
What Should You Do With Inherited Stocks?
While difficult, do not get sentimental about your position. The stocks might inspire fond memories of your loved one, but they are financial holdings, not tokens of remembrance. In these situations, we need to remain rational by taking an impartial review of each holding and putting in place a financial plan.
We need to ask ourselves two questions:
1. Is this a quality company and does it have potential?
2. Is this investment suitable for my portfolio?
To answer the first question, you should study the company’s financial performance over the past 10 years. If you are seeing steady earnings growth and an economic moat, look at how management does its job. If the stock passes the test, look at whether the stock will help diversify your portfolio by reducing the exposure to any one particular asset. Consider keeping the stock if it passes both tests.
Admitting our shortcomings and accepting that following the rules is the best way to handle oneself and one’s wealth.
What About The Pandemic?
While no one can forecast the market’s direction or predict which stock will outperform, markets have always rewarded discipline over the long term. In other words, we should look beyond the concerns of today and invest over the long haul.
In the context of the pandemic, which has upended all our lives and caused an economic downturn unseen since the GFC, we need to stay rational. History teaches us that revenue and earnings will pick up, as does the price. They always do.
In conclusion, our watchwords are discipline and rationale; disciple to focus on how we behave rather than how our investments behave and rationale to stay on course amid market volatility.
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in a financial plan and behavioural discipline that are likely to get you where you want to go.” – Benjamin Graham