Fifteen favourite fallacies

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10. "Paper losses aren't real"

Plenty of people allow themselves to believe that they have not made a loss until they sell and crystallise that loss. If you are among them, then ask yourself this: Are your paper profits unreal too? If your answer is no, then you are suffering from a mental disease highly detrimental to your wealth - SELF-DELUSION.

It is simply not consistent to treat unrealised losses any differently from unrealised profits. The only reason investors do so is that they cannot bear to admit to themselves that they have in fact suffered a very real loss. Typically, they feel a loss equals a mistake, and they are unable to own up to their mistakes.

Example

Another give-away sign of self-delusion is the belief that you have not "really" made a loss because eventually the share price will recover and you will get out even. This is usually accompanied by the fear that the price of your winners will fall back and your gains will be wiped out. These twin feelings are very dangerous. They will pressure you into selling your winners too soon, and clinging on to your losers for dear life. That way lies ruin.

"Paper" profits and losses are as "real" as the "bricks and mortar" equity in your house. You may feel that this too is unreal, because in some sense you cannot get at it. But in fact you can, and you will when you next move house. You will exchange that equity for cash to be used in your new purchase. That will be just as "real" a transaction as exchanging money for a loaf of bread.

Shares are exchangeable in just the same way. You swap them for cash whenever you deal. Companies often swap them for other shares when they make acquisitions. The current price of your shares is exactly like the exchange rates that apply to money itself. It is also the only honest way to measure the true worth of your portfolio.

1. "Investing is just gambling anyway, so why not take a few chances?" 2. "You've got to speculate to accumulate" 3. "Growth always wins in the end/Value always wins in the end" 4. "Blue chips are best/Smaller companies are best" 5. "Penny shares are the best value for money" 6. "It's such a great company, I can't go wrong" 7. "But just look at the dividends" 8. "I've got to be in technology/biotechnology/telecoms etc" 9. "I missed that one, I'll catch the next one" 10. "Paper losses aren't real" 11. "I'll never go broke taking a profit" 12. "It can't possibly go any lower" 13. "It can't possibly go any higher" 14. I can't sell because of the tax bill 15. "This time it's different" 16. Conclusion

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