My Thoughts and Your Actions

The below is a simple expression of some of the thoughts I’ve had over the last few weeks regarding what I’ve observed in others and what I’ve been thinking myself. It’s an effort to clear my head and refocus on what’s important.

The Way I See It

In the stock market there are animal spirits that make traders, speculators, and investors act in emotionally charged irrational ways. Most people consider this framework regarding human behaviour and its folly to apply to lofty bull market highs. Lately I’ve been wondering if too little attention is given to the irrational behaviour (particularly of long term investors) in the downturns.

For the past few years, stock pickers and commentators have been enthralled with the shiny new high-growth name and many were driving the prices of these securities to nose-bleed valuations.

In the past few months, the only thing that concerned investors has been valuations. Anectodally I’ve seen many comments akin to this:

Sure it’s a great business at a fair price, but I think it’ll go lower and I’ll buy it then.

- All of FinTwit

There are a couple of interesting takeaways from these observations:

1. People are prone to both recency bias and FOMO

2. People struggle to stay rational during either extremes in the cycle

To hammer this point home, ask the average investor to describe, using their investment strategy, what works over the long term. I bet they would say something that is reasonable, has been true in the past, and will likely work going forward (with an appropriate time frame).

If you then ask them to explain what they plan to do in the next couple of months, they are likely to wander off script from their strategy. They are likely to drift further from their strategy the more extreme the current market sentiment is. They can only think straight when there’s a normal amount of stress in their environment.

For most investors, the best strategy is not the one that will give you the highest returns but a good one you can stick to through difficult times.

- Joel Greenblatt

I don’t think I’m immune to this at all. Lately, I’ve found myself thinking about all kinds of different ways to shift my portfolio and asset allocation given the pain in stock prices. I’ve considered deep value stocks, net-net strategies, and looking at some of the fallen angels of the recent tech wreck. While I think it’s fine to change your mind and direction in your investments over time, I think you should do it with a sound mind and for the right reasons. In terms of changing direction, I’ve done it myself and wouldn’t feel hypocritical to do it again. My current strategy of holding high quality businesses at fair prices for long periods is still what I believe will work for me… so why change? After some reflection, it seems like changing direction would be short sighted for me. That’s not to say it wouldn’t be the right thing for you. Just make sure it’s not some fear of the market churn or macroeconomic nightmare scenario pushing you to do something. Own your decisions.

Looking Ahead

Now, the only thing that is going to matter in investing is the future. So, in contrast to what I wrote above, I think it’s important to be very open minded to other ideas, mental models, and with the fact that I might be wrong! What a pickle! In an attempt to square this circle, I’ll leave you with this from one of the OG’s.

Rationality is something that you get slowly and it has a variable result. But it's better than not having it. I just think that you can see how awful it is when people get into these furies of resentment and anger, and sure they're right about everything...I actually work at trying to discard beliefs. Most people just cherish whatever idiotic notion they already have because they assume it must be good. Think of the brilliant people who do some of the dumbest things.

- Charlie Munger

That’s it for now, check back soon for more. As always, follow me on twitter and please share this with anyone who might interested in my work.

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