A stock can look very different six months after purchase, especially when its price has fallen way below the original entry point.
Most investors hold on, waiting for the price to recover rather than locking in a loss. A pattern one of the most successful investors alive says causes lasting financial damage.
In his 2024 letter to Berkshire Hathaway shareholders, Warren Buffett identified a behavioral pattern he called “the cardinal sin” of managing a business.
His late partner, Charlie Munger, had a blunter label for the habit of sitting on known problems and hoping they disappear on their own: “thumb-sucking.”
Buffett admitted to misjudging businesses, managers, and capital allocation at Berkshire
Buffett’s candor in the 2024 Berkshire Hathaway annual letter went beyond a single line about thumb-sucking.
“The cardinal sin is delaying the correction of mistakes or what Charlie Munger called ‘thumb-sucking.’ Problems, he would tell me, cannot be wished away. They require action, however uncomfortable that may be,” Buffett wrote in the annual Letter.
His argument was direct: once you know something is broken, every quarter you wait to act compounds the cost.
Berkshire’s own Alphabet position illustrates what that delay looks like at scale.
At Berkshire’s 2017 annual meeting, Buffett and Munger acknowledged missing Google as their worst mistake in tech, with Buffett citing GEICO’s Google ad spending as direct insight into the business.
Two days later, on CNBC’s “Squawk Box,” Buffett called Google “an extraordinary business” with “some aspects of a natural monopoly.” Berkshire did not open a position for another eight years.
The firm opened its first Alphabet stake in the third quarter of 2025, buying 17.85 million shares valued at roughly $4.3 billion, and by the Q2 2026 13F filed August 14, 2026, that stake had grown to roughly 106 million shares, making Alphabet Berkshire’s third-largest holding, in a company Buffett had said Berkshire should have owned sooner.
The SEC identified a behavioral bias that explains why investors hold losing stocks
Behavioral researchers have given the pattern Buffett described a clinical name that appears in federal investor education materials.
The SEC’s Office of Investor Education and Advocacy calls it the disposition effect, based on a Library of Congress report the agency commissioned in 2010.
The report describes it as investors’ tendency to hold losing investments too long while selling winning investments too soon.
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Terrance Odean, now a professor of finance at the University of California, Berkeley, tested the effect using 10,000 brokerage accounts.
His 1998 Journal of Finance study found that investors were roughly 1.5 times as likely to sell their winning positions as their losing ones.
That lopsided emotional math pushes investors to hold falling positions, because selling would force them to register the loss as permanent rather than temporary.
Michael M. Santiago / Getty Images
One question can reveal whether patience or avoidance is driving your portfolio decisions
Shefrin and Statman’s 1985 Journal of Finance paper, titled “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence,” later described in the SEC bulletin, identified the desire to recover the original purchase price as its core driver.
One reframing test, popularized by fund manager Peter Lynch in One Up on Wall Street and echoed in behavioral finance literature, captures the spirit of Buffett’s warning: ask whether you would buy the same stock today, at its current price, with cash sitting idle in a savings account.
A “no” separates a sound reassessment from an avoidance decision, but it does not, in itself, dictate a sale, tax treatment and time horizon shape what comes next, Certified Financial Planner Board guidance noted.
What Buffett’s thumb-sucking test means for your next portfolio review
Buffett drew a clear line in his letter between patience built on a sound investment thesis and inaction driven by emotional avoidance. The second kind persists because admitting a mistake often feels worse to an investor than watching the position continue to lose value.
The winning stocks investors sold went on to outperform the losing stocks they kept by 3.4 percentage points over the following year, Odean’s study found.
Every dollar locked in a holding with deteriorating fundamentals is a dollar unavailable for a position with stronger current prospects, and every quarter of delay is one where the compounding runs the other way.
Related: Warren Buffett named these 3 stocks as favorites for a reason
