Animal Instincts

“The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett

My dear wife is not one to mince her words. Those of you who’ve met her will know exactly what I’m talking about. I love her to death but whatever is at the top of her mind is what she says, whether it compliments or offends the person on the receiving end. That person usually tends to be me, and I’ve come home many times after a long day in the office only to be greeted by verbal daggers thrown at me for no apparent reason.  (There actually is always a reason, a very valid one at that. It’s because she’s at home trying to raise 3 kids all day without my help…which makes trading stocks look like a walk in the park…)

The ability to be honest, open and forthcoming is beneficial in certain situations in life. It can also be detrimental, especially if you don’t know how to control your emotions. Emotional control begins with the ability to take an introspective and objective look at one’s reactions in any given situation. This, in and of itself, is a valuable skill which few have mastered. It is what differentiates us from animals who are instinctual by nature and as hard as it may be to think before you speak or act, if you are able to master this correctly, it can also be used as one of your greatest advantages in life.  

When it comes to investing, emotional control is also of paramount importance. It’s one of the few things that can give you a unique advantage over the rest of the market. Over the last century not much has changed when it comes to investor psychology. Human beings love trading on newsflow or headlines. The current trade war situation is a prime example of headline investing at its best (worst). Back when this whole trade war thing started off, investors reacted with shock and fear and the market took a beating, as expected. Trade wars are not good for any economy or market and if you were able to digest those headlines when they happened instead of knee-jerk selling, you would have been given a rare opportunity to buy great companies at reasonable prices during the panic.

As weeks turned into months, slowly the trade war talk became more of a numbing annoyance as opposed to a headline threat. Like a drug that loses its potency over time with abuse, the bad news became “priced in” and investors kept plowing ahead, looking for the next excuse to sell. With geopolitical turmoil as a “base case” scenario now, investors viewed the position resolution with Mexico last week as a win and pumped up the market further.

Speaking of which, another headline that hit the tape recently was the “all-time highs” of the market headline. If you believe in mean reversion at all then an “all-time high” would be precisely the point where you start taking profit on a significant amount of your holdings as opposed to piling in further. But when all the buzz out speaks of robust US economic data and positive sentiment abounds, its difficult to have the self-control to not jump on the bandwagon.

One of the most effective ways to control your emotions is by practicing patience. It’s a concept that only gets understood with age and experience and over the years I’ve grown to realize that it’s a powerful tactic to maintain control over any situation (even when my wife throws daggers at me for no apparent reason…!) Delaying gratification, being long-term greedy, the marshmallow test… we’ve all heard these cliches before and know what they refer to. But patience, when you are trying to create wealth, is always easier in theory than in practice.

Being able to play the long game and not getting too caught up in the day to day is a key obstacle that directly affects your success. But don’t be discouraged. A funny thing happens when you zoom out and stop focusing on the minutiae. Things start to happen. Checking daily (or hourly) price movements is exciting and addicting but it’s important for us to remember that target prices are rarely achieved overnight. When it comes to investing at the peak of “the longest bull market in history” this particularly rings true.

Let’s frame this another way. If you had to buy and hold your investments for the next 5, 10 or even 20 years without having the ability to sell them, how would that change the way your portfolio looks today? One of the benefits of early-stage investing is this very feature — the little to no liquidity available in the asset class of venture capital. What this forces you to do is pay extra attention to the underlying business and team knowing full well that your investment will be locked up for a number of years with no liquidity. By taking this same investment approach, when markets hit an “all-time high” it’s probably a good idea to do a portfolio review of your current holdings to determine what should stay and what needs to go.  

Do you have the patience and discipline to wait for a sell-off to buy the companies you want in your portfolio? Or do you fear that the markets will never correct and every company will be worth more tomorrow than it is worth today?