You’re sitting inside the cockpit of a converted ICBM missile about to be launched into space. The last 7 times NASA test launched this rocket it was a success, but the first 20 test launches had a 45% failure rate. How fast do you think your heart would be beating?
If you’re John Glenn sitting in your Atlas rocket your heart rate barely rises above 110 bpm.
They’ve lit the candle and there’s no turning back, and yet there’s no surge inside him. His pulse rises to only 110, no more than the minimum rate you should have if you have to deal with a sudden emergency. How strange that it should be this way! He has been more wound up for a takeoff in an F-102. – From The Right Stuff by Tom Wolfe
John can’t panic. Panicking in a rocket ship is certain death. Why didn’t John Glenn panic? It was trained out of him.
Before the first launch, NASA re-created the fateful day for the astronauts over and over, step by step, hundreds of times – from what they’d have for breakfast to the ride to the airfield. Slowly, in a graded series of “exposures” the astronauts were introduced to every sight and sound of the experience of their firing into space. They did it so many times that it became as natural and familiar as breathing. [emphasis added] – from The Obstacle is the Way by Ryan Holiday.
A panic state shortens our perception of time. We don’t think about the long-term anymore. We focus on what is happening now. So, we make short-term emotional decisions that make us feel good immediately but harm our long-term goals.
In the modern world, money equals life. It is how we provide food and shelter for ourselves and our families. The thought that we’ve lost money puts us in a state of panic. If you have money in the stock market and you’re checking prices on a daily basis you are setting yourself up to be in a perpetual state of panic because on any given day it’s close to a 50% chance that the stock market will be down. In this state of panic, you’re more likely to make a short-term emotional financial decision that makes you feel good now but harms your long-term investment goals. Like selling stocks when the market is down in the name of protecting your assets.
In a study of 80 online day traders by Andrew Lo, Brett Steenbarger, and Dmitry Repin they found those that traded with the most emotion had the worst performance.
“…our results are consistent with the current neuroscientific evidence that automatic emotional responses such as fear and greed often trump more controlled or ‘higher level’ responses. To the extent that emotional reactions ‘short circuit’ more complex decision-making faculties…it should come as no surprise that the result is poorer trading performance.” – From The Behavioral Investor by Daniel Crosby
To take advantage of the stock market and long-term compounding it is about the time in the market and not timing the market. Excessive trading to avoid losses in the short-term leads to subpar performance and a higher risk of missing your goals. The very thing you were trying to prevent by avoiding short-term losses.
Can we be like John Glenn? Can we train ourselves to not panic? Can we create an environment that favors long-term decision making?
The first step is to not focus on the daily price movements of your portfolio. These are long-term investments for long-term goals. Checking the daily price action serves no purpose except to tempt you into making a short-term emotional decision that will harm the long-term mission.
Not for some spiritual journey but to improve mindfulness, the art of being present. Good long-term decisions come from slowing down our thinking. A study found those who meditated had lower brain activity in the parts of the brain that controlled our fear and greed. The two major feelings that lead to ruinous short-term financial decisions.
Rules and Automation
Automate as much as possible. Remove as many decision steps as possible.
By establishing rebalancing, buy, sell, and trimming rules before entering a position we can prevent our reliance on decisions influenced by our short-term emotional state.
Reducing the Odds of a Poor Decision
We focus on companies with high returns on invested capital or equity, with manageable debt loads, that lead their industry, and are riding a secular trend. Reducing our exposure to turnarounds, story stocks, Meme stocks, and complicated corporate restructurings increases our ability to ride out the normal fluctuations of the stock market without elevating our emotional state.
We can’t remove all emotion. Who would want to? Emotions spice up our lives. But we have to realize that emotions and investing do not mix. We have to create environments that help us remove as much emotion as possible from the equation. Any replacement of our short-term thinking with long-term thinking helps us better achieve our long-term goals.
This is the intro to the 49th issue of the AMM Dividend Letter which breaks down our position in Home Depot (HD).