“Thar she blows!” “Where away?” “Three points off the lee bow, sir.” “Raise up your wheel. Steady!”

Illustration: I.W. Taber. Source: Wikipedia

It’s easy to become obsessed. Melville’s famous novel Moby-Dick describes Captain Ahab’s obsession with a giant albino sperm whale. On a previous voyage, the white whale had bitten off Ahab’s leg, leaving him with a prosthesis. Ahab goes on a mission of revenge, casting his spell over the rest of the crew. His fanaticism robs him of all caution. In the end, Moby-Dick destroys the ship and drags Ahab to the bottom.

When you’ve suffered a loss in the market, the best thing to do is to put it behind you. Sometimes it’s because the nature of the economy has changed. Sometimes there was an unexpected development—new management, or some external factor. Sometimes you simply miscalculated. Whatever the reason, it’s important to understand that markets are forward-looking. They take current circumstances and future expectations and try to discount all the expected cash-flows to a present value. That’s what market prices represent.

S&P 500 for the last 2 years. Source: Bloomberg

So when they move significantly, it’s because the outlook is different. A stock doesn’t know that you own it, and it certainly doesn’t care what the price was when you bought it. Investors can get obsessed with “getting out even.” But that’s a mistake. The only reason to worry about where you bought a stock is to manage your tax-liability.

In the midst of the conflict, Ahab was given a final chance to give up his fanatical quest, but he rejects this—to his doom. Investors need to be sure they’re thinking and planning rationally—and not obsessively.

Douglas R. Tengdin, CFA

Chief Investment Officer

[tags Moby-Dick, obsession, cost-basis

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