Every investor has a name or two they’ll never own again – and it’s rarely about the fundamentals.
By Clare Flynn Levy
Clare Flynn Levy is CEO & Founder of Essentia Analytics. Prior to setting up Essentia, she spent ten years as a fund manager, in both active equity (running over $1B of pension funds for Deutsche Asset Management), and hedge (as founder and CIO of Avocet Capital Management, a specialist tech fund manager).
There’s a stock you used to own. You bought it with conviction. It went against you. At some point you’d had enough, so you sold it at a loss, licked your wounds, and moved on.
And now you won’t go near it. Not because it’s not investible, but because the very idea of buying it back makes you wince.
You’re treating the stock like an ex you’ve blocked. It did you wrong, and you are never, ever speaking to it again.
I saw this in myself when I managed money, and I’m seeing it come up with managers again and again when we talk about cutting losers: they’re aware that if they cut, they are unlikely to get back in again – what if it finally starts going up and I miss it?
If you’ve read Stock Market Maestros, you’ll recall that several of the portfolio managers profiled mentioned this issue. Even the most highly skilled investors don’t trust themselves to get back in to a loser they’ve cut.
Repurchase bias, as it’s known, is a well-documented phenomenon. Strahilevitz, Odean and Barber (2011) studied more than 660,000 individual investors and found that they were one-half to two-thirds more likely to buy back a stock they sold for a gain than one they sold for a loss. The reason for shunning the loser isn’t the fundamentals – it’s regret. Getting back into a relationship with that stock means reopening the wound.
Taking a loss can be emotionally scarring. But we’ve got to get over it, if we want to make money as public equity investors.
Fund managers are no less biased than the rest of us when it comes to this behavior. Du, Niessen-Ruenzi & Odean (2024) found that a stock sold by a mutual fund manager at a loss was roughly 20% less likely to be bought back than one sold at a gain.
Behavioral economists have a broader name for the instinct underneath it: the snakebite effect. Get bitten once – take a loss – and you’re twice shy, taking less risk long after the odds stop justifying the caution.
If you’re thinking “Clients don’t like to see the portfolio exiting and re-entering the same positions like that. They have invested with us because we are long term and don’t trade a lot,” I hear you. Except that, in their study, Du, Niessen-Ruenzi & Odean found that it’s not really about that. When the fund managers in the study changed jobs and moved to a new fund, they still shied away from the stocks they’d lost money on at the old shop, even though the investors involved were long gone and no one at the new place knew anything about it. Taking a loss can be emotionally scarring.
But we’ve got to get over it, if we want to make money as public equity investors. Given the relatively stagnant IPO markets of recent years, we are already hunting for alpha in a smaller investible universe than we used to have. Succumbing to repurchase bias only shrinks that investible universe further – making the job of active fund management that much harder.
There’s also an elephant in the room: The growing proportion of market participants that are not human do not suffer from repurchase bias (unless they have been deliberately designed to). They remain fundamentally objective where the human investor must navigate a behavioral minefield.
It’s worth considering what AI would do in a repurchase scenario. It would keep a watchlist of every position you’ve exited. It would re-run the thesis on each one, on a schedule, with no memory of the pain. It would ask a single question – is this one of the best opportunities available to me right now? – and it would not care in the slightest that the answer was “yes” on a stock that lost the portfolio money in the past. The machine feels no shame or embarrassment. That’s its edge.
A human fund manager with access to market data and AI can do that too, by the way.
In my last post, I talked about why cutting losers is so hard, and what you can do about it. I argued that, given that the majority of even the most skilled fund managers have hit rates below 50% (ie. pick stocks that outperform less than half the time), all serious investors need a process for knowing when they’re wrong – and doing something about it. This is the other half of the same discipline: a process for staying open to something you were once wrong about.
Remember, a stock is not a person, prone to the same behavioral patterns throughout their life if they don’t make an effort to correct them. A stock price is a reflection of an ever-changing situation. It’s not prone to anything. Just because you got it wrong once doesn’t mean you’re more likely to get it wrong if you try it again. So, really, it should stay as an option on the table.
Just because you got it wrong once doesn’t mean you’re more likely to get it wrong if you try it again.
Here’s the discipline in practice: when you exit a stock, it goes straight onto a watchlist. You set review points – once a year, at a minimum. And at each review point, you ask the question AI would be asking: not “how do I feel about this name?” but “based on the facts – if I had no history with it at all – how much would I want to own it today?”
If the answer is “a lot,” buy it. Then say so. A re-entry that’s the output of a documented, repeatable process isn’t churn – it’s discipline made visible, and it’s a far easier story to tell a client than a gut call. Investors don’t punish deliberate, process-led decisions. They punish decisions that feel arbitrary.
The ex you blocked actually wronged you. The stock never did – your own regret did. And unlike an ex, a stock holds no grudge in being called again. So stop letting a single bad date close off part of your opportunity set. In a market where the machines feel nothing and the investible universe is already shrinking, that’s an edge you can’t afford to give away.
Sources
Strahilevitz, M. A., Odean, T., & Barber, B. M. (2011). Once Burned, Twice Shy: How Naïve Learning, Counterfactuals, and Regret Affect the Repurchase of Stocks Previously Sold. Journal of Marketing Research. Full text (PDF)
Du, M., Niessen-Ruenzi, A., & Odean, T. (2024). Stock Repurchasing Bias of Mutual Funds. Review of Finance. Journal page · SSRN working paper
Snakebite effect — post-loss risk aversion, originating in Thaler, R. H., & Johnson, E. J. (1990), Gambling with the House Money and Trying to Break Even, Management Science. Accessible overview: FPA, Controlling the Urges
