Last week, Citi downgraded Oversea-Chinese Banking Corporation (SGX: O39), or OCBC, to “sell”.
The reaction was swift.
By the end of last week (9 October), shares of OCBC and United Overseas Bank (SGX: U11), or UOB, were around 11 per cent below their 52-week highs.
Meanwhile, DBS Group (SGX: D05) was down by a little over seven per cent.
In turn, the Straits Times Index (SGX: ^STI) was around 7.3 per cent off its peak.
While the decline was quick, it’s not a market correction — that would be a decline of 10 per cent or more.
Yet, the mood has shifted just as quickly.
A week ago, I reckon many Singapore bank shareholders were wondering how much higher their shares could go.
Now, they’re wondering how far their shares could fall.
Here’s the truth: the banks’ operations haven’t changed in a week.
So why does a modest dip feel so unsettling?
When the pain of loss overwhelms the joy of gains
Imagine this: you open your brokerage account and see two stocks.
One is sitting on a S$1,000 paper gain.
The other is sitting on a S$1,000 paper loss.
In theory, there is no difference between the two.
The gain cancels out the loss, and your portfolio hasn’t moved a single cent.
In practice, there is. The joy of gains is often overwhelmed by the dread of losses.
Which one will your eyes keep going back to? I bet it’s the loser.
It’s not just you. It’s how we are wired.
Psychologists Daniel Kahneman and Amos Tversky called this loss aversion: losses loom larger than gains of the same size.
In “Thinking, Fast and Slow”, Kahneman notes that losses typically weigh 1.5 to 2.5 times as much as equivalent gains.
That’s why last week’s dip may have felt far bigger than seven per cent.
Here’s the thing: loss aversion didn’t start working last week.
It was there all along, even when stocks were rising.
It simply asks a different question about our losers, depending on which way the market is moving.
Are you scared or embarrassed?
When share prices fall, risks move to the forefront.
Risks which were already present become the centre of discussion.
When prices rise, the focus changes.
Your losers aren’t collapsing.
They simply aren’t keeping up — it’s the few red figures that stick out like a sore thumb in a sea of green.
So, you ask: why isn’t my stock keeping up?
Therein lies the danger.
Fear is loud.
As last week showed, you know when you are feeling it.
Embarrassment is quiet.
It doesn’t feel like an emotion at all.
Instead, it feels like an opportunity loss — your money isn’t working as hard as it should.
In my view, that makes it the more dangerous of the two.
It quietly nudges you to sell your losers and put the money into the stocks that have done really well.
It looks like discipline.
But more often than not, it’s the pain of loss looking for an exit.
Yet, few investors who make this swap would call it embarrassment.
Most would call it opportunity cost.
The seductive logic of opportunity cost
The idea behind opportunity cost is simple.
Every dollar stuck in a lagging stock is a dollar that isn’t compounding in a winning stock.
To be fair, these investors aren’t wrong about the concept.
But an accurate concept does not guarantee an accurate execution.
There’s nothing wrong with the intention.
Most of us want our portfolios to squeeze out every bit of return.
The trouble starts when optimising becomes the driving force behind every decision.
More often than not, that urge comes from the nagging sense that you are falling behind.
And an investor who feels behind is prone to mistakes: trading too often, chasing stocks that have already run, and giving up on good businesses too soon.
Here’s the paradox: if you want better returns, stop optimising for returns.
Optimise for your peace of mind instead.
A sound mind makes better decisions.
And better decisions, compounded over years, lead to better performance.
Economist John Kay calls this obliquity: some goals are best reached indirectly.
Get Smart: Ask a better question
So, what should you do the next time a red number catches your eye?
Start by changing the question.
“Why have shares fallen?” is about the scoreboard.
The better question works in any market — is the business performing the way it should?
Take the banks.
Nothing has changed in the financial figures they reported in early August.
The share price moves since then, up or down, have been driven by sentiment.
To answer the question, revisit why you bought the stock.
If you keep an investing journal, check the reasons you wrote down and the risks you flagged.
Then try the fresh-cash test: would you buy this stock today, at today’s price?
If the answer is no because the business has deteriorated significantly, sell — whether the number is red or green.
But if it is yes, the red number is just noise.
Remember the two stocks at the start?
In theory, they’re the same. In practice, they never will be.
You can’t switch off loss aversion.
But you can stop letting it ask the questions.
Your losers may embarrass you.
Just don’t let them make your decisions.
Don’t let market uncertainty hijack your financial dreams. While headlines scream gloom, 5 Singapore companies have been quietly building wealth and paying reliable dividends. You’re probably overlooking them. Discover these resilient giants and their secrets to sustained income, even through global storms. Click here to download your free report now and secure your financial future!
Follow us on Facebook, Instagram, Telegram and YouTube for the latest investing news and analyses!
Disclosure: Chin Hui Leong owns shares of DBS Group, OCBC and UOB.
