Want to invest like Warren Buffett? Always ask yourself this 1 question before buying or selling via CNBCMakeIt
Imagine taking a six-hour flight from New York to Los Angeles, but right before taking off you learn the airline has a new policy: Reclining your seat is negotiable.
The difference can be explained by what behavioral economists call the"endowment effect," where a person places more value on what they have than what they don't have. So if you were the reclinee, your legroom is $27 more valuable than your neighbors, simply because it belongs to you. You're probably thinking that placing more value on the things we already have is harmless behavior, but it cuts both ways. For example, it doesn't help when you hold onto a losing investment.
To avoid this trap, here's the one question successful always ask themselves about each investment they own: "If I didn't own this stock or bond today, would I still buy it now?Warren Buffett echoed this very idea when he wrote in his 1996 annual letter to shareholders,"If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes.
When you sell, you should be refining how you invest and improving your ability to make better decisions. As a result, your portfolio should improve.
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