Procedures
“The best investors make a habit of putting procedures in place, in advance, that help inhibit the hot reactions of the emotional brain.” —Jason Zweig
The major market indices once again lost more than 2% this past week, with the S&P 500 down 2.5% and the Nasdaq down 2.6%.
There’s a saying that if you’re going to panic, it’s best to panic early.
In January and February of 2020, when reports and worries and rumors of a potential pandemic were starting to spread, it would have paid to panic early by selling stocks and shorting the market—and stockpiling toilet paper for that matter. The S&P 500 fell 34% from February 19, 2020 to March 23, 2020.
But the problem, if you were short, is that the market then rocketed higher, reaching its previous high by August and finishing the full year up more than 18%. So, if you didn’t close out your shorts before the rapid recovery, you probably had a very bad year.
In 2021, as interest rates were still low when inflation started to show up, it would have been wise to panic early if you held any fixed income other than very short-term bonds. Ditto in March of 2022 when the Fed started to raise rates.
Over the last few years, things in the markets and the world could have played out far differently. The pandemic could have been even more severe. Inflation could have been worse and even gotten out of hand. The government's reaction could have been far different, too—for better or for worse.
Even if you’d have panicked early about the pandemic, inflation, and rising rates, you could have lost plenty of money if you made the wrong investments or didn’t anticipate how governments and central banks would react to those things.
And as we sit here today, with more geopolitical risks in the news and the risk of recessions spooking the market, some are saying it’s time to panic early once again.
Maybe they’re right. We don’t know.
But what we do know is that when it comes to investing, one is always dealing with an uncertain future. One is constantly dealing with risk (more things can happen than will happen). A good investment process has procedures in place to deal with that uncertainty—and to deal with the emotions that are part of the money game.
“Risk exists only in the future, and it’s impossible to know for sure what the future holds.... No ambiguity is evident when we view the past. Only the things that happened, happened. But that definiteness doesn’t mean the process that creates outcomes is clear-cut and dependable. Many things could have happened in each case in the past, and the fact that only one did happen understates the variability that existed.” —Howard Marks
Tweets of the Week
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Dino Polska: Where is it headed? A destination analysis
Learning from Bloomberg’s Michael Bloomberg
Invest Like the Best Podcast: Aswath Damodaran - Making Sense of the Market Pt. 2
Value Investing with Legends Podcast: Sheldon Stone - Liquidity, Covenants, and Capital Availability
Focused Compounding Podcast: Ep 412. The Many Different Ways to Guess a Business’s Future Revenue
Compounders Podcast: Willingness to Fade the Prevailing Narrative with Tobias Carlisle
Plain English Podcast: The Science of Achievement, With Adam Grant
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