[MUSIC] Mistake number two, and we've alluded to this mistake already. This was in Course 2, which was called Meeting Investors Gold. I have a video in there and it's called Buying Is Easy, But When Is A Good Time To Sell? You'll remember it if you've seen it, otherwise please go and watch it. Mistake number two is this idea, and I found is very, very, very, very, often, the idea that we don't sell. We don't sell a position, we don't exit a position, an investment if we are below the purchase price. Just because we believe, we tend to believe that as long as we don't sell, we don't lose. I told you even in French, it rhymes. It's sounds nice, [FOREIGN] I don't sell, I don't lose. This is wrong. It's wrong because, and we'll have a look at this in more details also in a video in this course. We have to make a distinction between realized returns and unrealized returns, or realized losses, if you prefer, and unrealized losses. If you don't sell, you make an unrealized loss, but the loss is still there. It's not that it's just not there, it is there. I give you one example. This is also some which we've already seen, although it was in a different setting. It was when we were talking about value versus growth and we looked at the example of L'Oreal versus Renault, the two French companies. L'Oreal is in blue here and Renault is in red, but let's just focus on L'Oreal. Let's assume that you come at the peak of a market. This may sound hey, hey, I don't buy high, sell low, I'm a good investor. We tend to think of ourselves as investors being able to buy low, sell high but sometimes we have to acknowledge [LAUGH] that we buy high. Why is this? Because at the end of a bull market, this is where there's lots of hype, a lot of excitement about the stock market, everyone talks about it. It seems like it's going to go up to the sky, the sky is the limit, so there's a lot of enthusiasm and we tend to get carried away with the crowd. We tend to behave a little bit like the herd, herd behavior, and we buy just because it's been rising a lot. So, we come here at the peak of the bull market in 2000, when L'Oreal is worth 600 euros and we buy the share. You bought the stock at 600 euro and then too bad, it's the peak of the bull market and you see that we have this severe correction and the stock goes from 600 to less than 400 by 2003. What do you do then? You don't sell because you're below your purchase price and you don't want to realize the loss, so you just keep it there. Plus, we saw also that a major difference between when we talked about hedge funds, if you're long and you're wrong, the weight of your mistake decreases. Maybe L'Oreal accounts for 6% of your portfolio when you buy it in 2000 and now it only accounts for 3.8% of your portfolio. So, you sleep not so badly because you say okay, I'm wrong, I lose on this investment, but the weight of my mistake decreases. Unlike, but this is a separate issue, when we short a stock and it goes up instead of going down as we would like, then the weight of our mistake increases. But that's a separate issue. In 2003, things gradually improve and the bull market resumes. You're better off. It increases, it increases, increases and too bad, in the summer of 2007, you go on holiday, and you leave your iPad, your newspapers, you go on an island. There's no wi-fi, no Internet, no nothing, you just rest and [SOUND] too bad, you miss the fact that L'Oreal, went above your purchase price of 600 and when you go back from holiday, it's back below. You say, [SOUND] I missed the exit here. [SOUND] We get another severe correction and we see here it's even more severe than the 2000, 2002 bear market. L'Oreal tumbles even below the bottom it had in the previous bear market. So, March 2009, the market resumes its up trends. The rally goes on, and it goes on and goes on. Here we are beginning of 2012, finally, [SOUND] you breathe, your head is above the water, you are above your entry point, you are above your purchase price again. What do you do? What would you do then? This is a poll, let's pause here for a minute and give your answers. What do you do when you recover after being for such a long time below your purchase price? I won't see the results of the poll until you put the answers, but I can bet you one thing, a majority of you would be selling. Why? Because you've been suffering for so long. You've been below your purchase price and finally, you're above it and you sell. And finally, you made a tiny return if you compare, maybe you sell at 605 euro but this is 12 years after you bought it at 600. That doesn't look like a very high yearly return. The key thing I want to convey here with this second mistake is basically, what does L'Oreal care about the fact that you've entered the position at 600 and then it went to 350? And then it resumes back above 600 and you sell. How does that influence the evolution of the share price? The future share price actually looks like this. Hey, you imagine? You keep your position, and now you sell it for almost double. You bought at 600, now you would be selling above 1,000. Mistake number two and this I encounter very, very, very often, we tend to pay way too much attention to a purchase price and we tend to react according to this purchase price. If we are below, we don't do anything and if we are below for a long period, the minute we're above, we sell. But we sell irrespective of the fundamentals. Maybe the company is now coming with new lines of product, which are going to be doing a killing on the market and the revenues, and the earnings will skyrocket and the stock price as well. Why would you sell? I tell you, my best piece of advice to you, to avoid making that mistake, is just forget the price at which you bought the stock. Just look ahead, don't look in the rear mirror. [SOUND]
