We live in a world where kids get seventh-place trophies. It’s embarrassing.
As my friend Phil Pearlman said during one of my recent podcasts, “If my kid ever gets one of those, I’ll make him throw it away.”
What’s wrong with taking the loss, learning to live with it, and then moving on?
In October, Dr. Brett Steenbarger shared some of his thoughts on visualizing yourself taking the loss, before even entering into an investment.
Already going through that “pain” in your head makes the loss easier to accept in the future if and/or when we are wrong.
Last month I wrote you an email, “The Market Owes Us Nothing,” so we remember that indeed, the market does not owe us a single thing.
Financial advisors put that compound interest chart in front of investors like a carrot, and then investors get upset when the market is not going up.
The better chart is the one showing the massive drawdowns in stocks over the past century. We see 10% and 20% corrections all the time and sometimes even 50%.
That’s the chart that needs to be dangled in front of investors like a stick, rather than a carrot. But that one doesn’t help raise assets.
In Dr. Daniel Crosby’s new book, “The Behavioral Investor,” he brings up the topic of loss aversion in both markets and life. As I shared with Breakout Profits subscribers a few weeks ago, he told me this is his favorite paragraph in the book:
I grew up in Miami and my parents were born in Cuba. They came over as little kids in the early 60s. I played baseball, obviously. I was even fortunate enough to play a little in college, but my 84-mile-per-hour fastball wasn’t enough to get me much further.
The lessons along the way, however, help me to this day in the markets, business, and life.
My whole life I played a sport where failing 70% of the time gets you into the Hall of Fame!
Learning how to lose was not only important, but essential to life as a ballplayer. You struck out three times tonight? Oh well, gotta play tomorrow, and tonight’s at bats have zero impact on tomorrow’s outcome. Suck it up and do better next time.
In baseball, you have to get over it. As a pitcher, you just allowed back-to-back home runs at UConn (that did happen to me, by the way), too bad. You have another hitter coming up who has his heart set on making it back-to-back-to-back. You have to move on.
Learning to lose is important.
In the markets, we are going to lose. That is a guarantee.
To be such a narcissist and think that you won’t be wrong is foolish. In fact, we always assume we’re wrong and think more carefully about the worst-case scenario than the potential reward.
It’s great that you think Apple is going to 300, but what is the risk? How much can we potentially lose in the off chance that you are incorrect.
So, what can we do?
I like the Brett Steenbarger tactic of visualizing the loss.
I like Phil Pearlman’s idea of throwing away your kid’s seventh-place trophy.
I like Dan Crosby’s thoughts on loss aversion.
I like putting your kid in sports and having them learn the hard way that losing is a part of life.
It’s not easy taking losses. It’s not easy admitting you were wrong. It sucks watching your portfolio go down and not up. But we’re not robots. We have emotions.
For me, it’s about channeling those fears and emotions, recognizing their existence and then using them to our advantage.
There is a huge arbitrage between those aware of these emotions and those who are either not aware, or in most cases don’t care to be. I believe it’s a massive arbitrage in both the markets and in life.
This is what I’m thinking as we continue in the early part of 2019.
What are you thinking? Email me at firstname.lastname@example.org with any comments or questions, and if you’re off for President’s Day today, enjoy it!
To wise trading,
Editor, Big Market Trends