The day I learnt to follow what I believe

During my student days I worked for an optician selling frames. I learnt early on to never ask, “Can I help you?”

These words were poisonous. They looked at you with this incredulous twinge of dread in their eyes that said, “Please leave me alone”.

Nine out of ten times the reply was, “Just looking thanks”.

Then they continued to “just look”, acutely aware that I was hovering in their peripheral vision. And, that was it – the sale was lost. After a few minutes they awkwardly headed for the exit and I never saw them again.

I discovered that the trick was to walk up to them and casually ask an open question like, “What style are you after?” or “Is there a particular look you’re going for?”

All I had to do was strike up a pleasant conversation. Once I did, I could offer my genuine sympathy on how difficult it was to pick a frame. I gave them advice and reminded them to take their time with such a difficult decision. I would happily put their minds to rest by holding a frame they liked on the side, so they could go home and think it over.

I seemed to be particularly popular with the old ladies. One of them, Mrs Nash, actually knitted me a jumper and scarf when she heard I was a student and couldn’t afford my heating bill.

I was very good at selling frames – perhaps too good. Once, Mrs Nash broke her glasses and brought them in to be repaired. Her clumsy son-in-law had accidently sat on them.

The lab technicians couldn’t order a replacement frame because it had been discontinued. She really like this frame even though it was a little worse for wear before she had broken them. So they popped out the lenses and sent them back to the factory to be repaired.

There was just one problem. When the frames returned, someone in the lab accidently sent them out to the shop floor. Then, I unwittingly sold them to another customer.

The manager called me to his office. He was furious and of course he blamed me. He told me I needed to take ownership, explain the situation to Mrs Nash and resolve the situation as soon as possible. I had 48 hours to offer Mrs Nash a free pair of frames from the discount range and it would be done at my expense. I guess he thought he could profit from the crisis and boost his sales figures at the end of the week.

Now I have a confession. I didn’t learn my lesson. When I became an investor, I accidently sold when I was not supposed to on numerous occasions, usually in a fit of panic. I was one of those typical amateurs that bragged about it when a stock I held went up, but I kept quiet on the ones I lost on.

Like many people, in the early days when you start investing you make these mental accounts of all the positions you hold and you unrealistically expect to realise a profit on each position. It’s impossible because there are some investments that if you are lucky you will break even, or more likely continue to make a loss on.

The problem is that humans are rubbish at mental statistics. We are really bad at making quick judgement calls on certain risks we face.

Take the example below. You have two choices, a coin toss or just-take-the-money:

So which one did you choose? Logically both outcomes have the same payoff.

A. ($100 x 50%) + ($0 x 50%) = $50

B ($50 x 100%) = $50

Surveys have shown that people like the certainty of making $50 and chose B.

The funny thing is that we do the complete opposite when we are losing money.

If the options were now:

A – 50% chance of losing $100 (heads) or 50% chance of losing nothing (tails)

B – 100% chance of losing $50

Which one would you chose? Surveys show most people choose option A this time around. They are prepared to take a risk to eliminate their losses. Again, the expected payoffs between both options are the same.

So why the change of heart?

In other words, it hurts much more when we lose money and so we behave differently. We become risk seeking and may abandon our previous convictions about what we invest in, even if we believe it’s right.

This behaviour is one of the reasons why we get sudden crashes in the stock market. Though long-term fundamentals should prevail if we are patient, markets are often vulnerable to human psychology in the short term. The market will, therefore, enjoy extended periods of “irrational exuberance” followed by acute panic. Two great recent examples were the dotcom bubble bursting in 2000 and the Great Financial Crisis in 2008. Do you remember that famous event that happened in 1929. Of course not, you weren’t born.

Mrs Nash was really mad when I tried to explain what happened. The store manager hid in his office as I painfully tried to resolve the situation.

I said to her, “Mrs Nash, have you thought of going for a new look?”

“I want my glasses” she yelled back, “the ones you accidently sold to another lady”.

Clearly my carefully crafted sales technique wasn’t going to help me much in this situation. She was visibly very upset and there was nothing from the discount-range that suited her taste.

“You looked stunning in your old glasses, but I’m giving you a free chance to get a new and better pair. Please we only have 48 hours”, I said.

I know, that was a pretty stupid thing to say, but I was desperate. It didn’t work unsurprisingly.

The funny thing is that a few months before she had come in to see me. She really believed that it was time to make a change because styles and fashions had moved on. She was thinking of buying a new pair and would keep this old pair as a spare. But, she put it off because it was quite a big decision to make.

The situation I was in was futile. I knew it was and so did she – her old glasses were not coming back – so after a while she calmed down and agreed that she would go away and think about it and would come back the next day.

She didn’t. She returned a week later. She bought the most expensive pair of glasses I had ever sold with new varifocal lenses and she was very proud of her new purchase. And, I understood why. She has no desire for a free pair of glasses that she didn’t want – she wanted the glasses we talked about a few months earlier.

I’ve always believed in sticking to your beliefs when you invest. A crash or a correction in the market can be unnerving. However, if the story behind the investment is sound, no matter how irrational the market might be, you should stick to what you believe.

However, you also need to know when to quit. Sometimes you have to close a position due risk constraints, liquidity issues or unexpected events. What I learnt was never let your emotions get to you, but be prepared at times to make tough decisions.

A sweet old lady called Mrs Nash taught me this valuable lesson when I was a student.

Afterwards, I walked into my manager’s office and told him, “I quit”.