Acting on fear

[premfan]

Recently i have been reviewing back on my best and worse investments. I have noticed the more comfortable i have been buying a company the worse returns i have achieved. The more uncomfortable i have felt when making a investment the greater the returns ( i have a mini checklist where comfort level is measured subjectively ).

 

All my investments are high conviction if they werent i would hold cash instead. Comfort level or fear is the most important metric i have noticed.  Being honest when you are fearful ( you guys are human right?) is a great skill to have. More importantly after doing the work. Gaining the conviction in your idea and still being somewhat uncomfortable making the bet is a good sign you should be making the bet.  I'm wondering if other board members have noticed their best returns where achieved when they were uncomfortable making the bet? ( Eric you dont have to answer we all know you are an investing savant)

 

[JBird]

Can you explain what you mean by comfort level?

[Palantir]

Conversely, when have your worst returns happened?

[Packer16]

I have felt the same way because when I am investing in something there is usually something wrong or it would not be trading for a cheap price.  If I listen to the comments from Wall Street analysts, I am usually on the opposite side if it is a larger company or an unknown if a smaller company.  This is a part of the market.  You are only going to make excess returns by buying when the consensus is wrong (too negative) and you are correct.  In the end it is a probability game as you will not have a 100% batting average.  If you are over 60% you are doing great since your upside should be greater than your downside.  The hardest part for me is being picky on what deals to invest in as I have an upside target of 100%.  Another tool for me is purchase and turn-off the stock quotes and if the stock continues to decline (which is typical) then review the thesis and buy more.  A current example is OIBR. 

 

Remember the name of the game is to take advantage of pricing mistakes in the market.  This is most likely where people do not want to invest and in most situation there is hair on the merchandise.  You just need to find out what kind of hair you are comfortable with.  I rarely invest in clean companies because most of the time they are fairly valued or over valued. 

 

Packer

[Kraven]

Recently i have been reviewing back on my best and worse investments. I have noticed the more comfortable i have been buying a company the worse returns i have achieved. The more uncomfortable i have felt when making a investment the greater the returns ( i have a mini checklist where comfort level is measured subjectively ).

 

All my investments are high conviction if they werent i would hold cash instead. Comfort level or fear is the most important metric i have noticed.  Being honest when you are fearful ( you guys are human right?) is a great skill to have. More importantly after doing the work. Gaining the conviction in your idea and still being somewhat uncomfortable making the bet is a good sign you should be making the bet.  I'm wondering if other board members have noticed their best returns where achieved when they were uncomfortable making the bet? ( Eric you dont have to answer we all know you are an investing savant)

 

This kind of reminds me of the horse handicapping study.  I'm referring to the one where handicappers were given a few pieces of data and then asked for their results, then given more pieces of data, etc.  Each time they got more data they felt more comfortable, yet their results didn't improve and in fact if memory serves were worse.

 

We all invest differently.  You have to do what makes you feel comfortable.  I would say for me one of the skills I have that has assisted me the most with investing is the ability to make decisions based on imperfect information and the ability to pull the trigger quickly.  That was all honed though from doing it in other contexts. 

 

To me, when I read your post I think that the investments that might make one the most comfortable are going to be very well known and "safe" in the sense that it's something like KO.  To be honest I've never spent any time on an investment like that, but I can imagine reading and reading and reading and feeling very good about Coke's place in the world.  However, other than a few times in the past few decades there hasn't been a time to buy KO, in my opinion, where returns will be anything to write home about.

 

Compare that to some little company that might have had major issues in the recent past and some less savory characters running the shop.  It doesn't provide that same comfort level but potentially provides outsized returns.

 

At the end of the day, you have to do what you think is right.  Know thyself.  If you try to be someone who you aren't, that can lead to bad results. 

[premfan]

Can you explain what you mean by comfort level?

 

Comfort level for me means going with a trend or crowd. Being on the same side as the majority of people. Not feeling nervous or uncomfortable pulling the trigger to buy some more. Feeling kinda cocky and thinking everyone else MUST be wrong.

 

My best returns have been when i have the "what i'm i missing" frame of mind. Why are people so negative when the numbers are positive?  Why is the market thinking bankrupty when their is no long term debt? Things that dont add up. A perception vs reality event where the market's perception is "x" and the reality according to me is "y" where a few key metrics make up that reality. Even after gaining conviction in the reality of the situation i still feel uncomfortable going against the crowd. Knowing that i'm uncomfortable is a good way for me to gauge if i should make the bet.

 

Conversely, when have your worst returns happened?

 

Recently, energold drilling has been my worse performer. Although, it has turned into more of a event driven company now. My best has been groupon i opened up a position late last year. I  made a thread outlining my thinking and even though i had conviction i was still uncomfortable making the purchase.

 

I have felt the same way because when I am investing in something there is usually something wrong or it would not be trading for a cheap price.  If I listen to the comments from Wall Street analysts, I am usually on the opposite side if it is a larger company or an unknown if a smaller company.  This is a part of the market.  You are only going to make excess returns by buying when the consensus is wrong (too negative) and you are correct.  In the end it is a probability game as you will not have a 100% batting average.  If you are over 60% you are doing great since your upside should be greater than your downside.  The hardest part for me is being picky on what deals to invest in as I have an upside target of 100%.  Another tool for me is purchase and turn-off the stock quotes and if the stock continues to decline (which is typical) then review the thesis and buy more.  A current example is OIBR. 

 

Remember the name of the game is to take advantage of pricing mistakes in the market.  This is most likely where people do not want to invest and in most situation there is hair on the merchandise.  You just need to find out what kind of hair you are comfortable with.  I rarely invest in clean companies because most of the time they are fairly valued or over valued. 

 

Packer

 

Good stuff. Its good to be reminded that the only way  to make excess returns is to buy when the consensus is overly negative. A perception vs reality event. 

 

Recently i have been reviewing back on my best and worse investments. I have noticed the more comfortable i have been buying a company the worse returns i have achieved. The more uncomfortable i have felt when making a investment the greater the returns ( i have a mini checklist where comfort level is measured subjectively ).

 

All my investments are high conviction if they werent i would hold cash instead. Comfort level or fear is the most important metric i have noticed.  Being honest when you are fearful ( you guys are human right?) is a great skill to have. More importantly after doing the work. Gaining the conviction in your idea and still being somewhat uncomfortable making the bet is a good sign you should be making the bet.  I'm wondering if other board members have noticed their best returns where achieved when they were uncomfortable making the bet? ( Eric you dont have to answer we all know you are an investing savant)

 

This kind of reminds me of the horse handicapping study.  I'm referring to the one where handicappers were given a few pieces of data and then asked for their results, then given more pieces of data, etc.  Each time they got more data they felt more comfortable, yet their results didn't improve and in fact if memory serves were worse.

 

We all invest differently.  You have to do what makes you feel comfortable.  I would say for me one of the skills I have that has assisted me the most with investing is the ability to make decisions based on imperfect information and the ability to pull the trigger quickly.  That was all honed though from doing it in other contexts. 

 

To me, when I read your post I think that the investments that might make one the most comfortable are going to be very well known and "safe" in the sense that it's something like KO.  To be honest I've never spent any time on an investment like that, but I can imagine reading and reading and reading and feeling very good about Coke's place in the world.  However, other than a few times in the past few decades there hasn't been a time to buy KO, in my opinion, where returns will be anything to write home about.

 

Compare that to some little company that might have had major issues in the recent past and some less savory characters running the shop.  It doesn't provide that same comfort level but potentially provides outsized returns.

 

At the end of the day, you have to do what you think is right.  Know thyself.  If you try to be someone who you aren't, that can lead to bad results. 

 

thanks for reply. I was curious to see if great investors on the board like yourself gauged comfort level ( or how ever else you want to describe it) when pulling the trigger. Maybe the great investors are a different animal where once conviction is bulit there is zero fear. For me i have noticed to accept and embrace the uncomfortable feeling and most importantly to be aware that it might be a good sign to pull the trigger even more.

 

[kevin4u2]

All good posts.

 

I would recommend reading about the different parts of the brain and what the different elements are responsible for. For example our limbic system is responsible for the emotional part of your thinking, fear included. This part of the brain is responsible for self preservation, fight or flight tendencies, and emotional hijacking. "Does it eat me or do I eat it?" is what this part of the brain processes, and we should be thankful it is located at the base of spinal cord. This allows for a quick response.

 

Today most threats are not physical threats but psychological threats however this part of the brain is unable to distinguish between the two. This part of the brain also becomes fused at the age of two and stops developing. That is. Why you can be 2, 42, or 82 and still have an emotional meltdown. If the fight or flight response is strong enough it will result in an emotional hijacking in which the cortex is flooded with hormones and the rational portion of our thinking is rendered useless. This happens countless times in the workplace and the home when someone threatens our ego. Often it isn't till after the chemical response has subsided that you will be able to think rationally and reflect on how irrational your behavior was.

 

The consequences to investing is numerous, however patience and emotional intelligence/awareness are key. There are numerous books these subjects for those interested. Just remember emotions are not tools of cognition, but they likewise shouldn't be repressed. I believe people are "wired" differently and thus WEB is an anomaly. That said, new neural connections can always be made in the brain, however one needs to greatly develop their critical thinking ability.

[Uccmal]

Great topic, awesome comments.

 

For me its a case of fear being a healthy thing.  Many days I have to work to keep the fear in check. 

 

Since I am often investing in opposition to a crowd, I have to actively work to control my emotions. 

 

I.e. A week or so ago Wells Fargo issued a report on Seaspan calling it a sell and reducing the target price well below $20.00.  The price has come down and I increased my position by around 40%.  It is one of my largest common positions.  IMHO, I know more about Seaspan than a Wells Fargo analyst.  They are downgrading it due to its exposure to China.  This exposure is irrelevant to SSWs short and medium term operations.  What I get is a stock with growth potential, and a dividend that has been increased at 25% the last 3 years.  I didn't get much fear with this but there is a healthy dose of self doubt. 

 

Every couple of weeks the markets churn up fear about QE.  If it is to be continued the banks stocks are seen to be a good thing.  If it is going to be stopped the bank stocks get kicked.  I completely dont see it this way.  From my perspective stopping QE and evening draining liquidity from the system indicates that the system may be healthy enough to stand on its own.  It tells me that the central banks can start to rebuild their firepower for the next round which strikes me as a good thing.  So the fed announces that Qe is going to be reduced, Markets tank, I buy AIG, and BAC.  As people get used to the idea the stocks rise back up and I slowly sell off.

 

As Kraven does I act quickly on ideas often with limited knowledge.  What I have a good handle on is what I dont know.  I think this is where Buffett excels.  Does anyone believe that he knows what is really on Goldman Sachs or GEs balance sheets?  Not a chance, but he knew in 2008 that an investment from him would protect those companies from becoming fatalities.  Same with BAC in 2011.  Handicapping describes it best.

 

I dont watch business TV at all.  I prefer to get my information through passive means that lack that direct connect to my reptilian brain that TV and Video seem to tap. 

 

"fear is the mind killer" Bene Gesserit saying

 

"we have nothing to fear but fear itself" Winston Churchill

 

"feel the fear and do it anyway" Susan Jeffers - book title

 

"best time to invest is when there is blood on the streets" Baruch

 

 

 

 

 

[premfan]

Great topic, awesome comments.

 

For me its a case of fear being a healthy thing.  Many days I have to work to keep the fear in check. 

 

Since I am often investing in opposition to a crowd, I have to actively work to control my emotions. 

 

I.e. A week or so ago Wells Fargo issued a report on Seaspan calling it a sell and reducing the target price well below $20.00.  The price has come down and I increased my position by around 40%.  It is one of my largest common positions.  IMHO, I know more about Seaspan than a Wells Fargo analyst.  They are downgrading it due to its exposure to China.  This exposure is irrelevant to SSWs short and medium term operations.  What I get is a stock with growth potential, and a dividend that has been increased at 25% the last 3 years.  I didn't get much fear with this but there is a healthy dose of self doubt. 

 

Every couple of weeks the markets churn up fear about QE.  If it is to be continued the banks stocks are seen to be a good thing.  If it is going to be stopped the bank stocks get kicked.  I completely dont see it this way.  From my perspective stopping QE and evening draining liquidity from the system indicates that the system may be healthy enough to stand on its own.  It tells me that the central banks can start to rebuild their firepower for the next round which strikes me as a good thing.  So the fed announces that Qe is going to be reduced, Markets tank, I buy AIG, and BAC.  As people get used to the idea the stocks rise back up and I slowly sell off.

 

As Kraven does I act quickly on ideas often with limited knowledge.  What I have a good handle on is what I dont know.  I think this is where Buffett excels.  Does anyone believe that he knows what is really on Goldman Sachs or GEs balance sheets?  Not a chance, but he knew in 2008 that an investment from him would protect those companies from becoming fatalities.  Same with BAC in 2011.  Handicapping describes it best.

 

I dont watch business TV at all.  I prefer to get my information through passive means that lack that direct connect to my reptilian brain that TV and Video seem to tap. 

 

"fear is the mind killer" Bene Gesserit saying

 

"we have nothing to fear but fear itself" Winston Churchill

 

"feel the fear and do it anyway" Susan Jeffers - book title

 

"best time to invest is when there is blood on the streets" Baruch

 

I think you hit the nail on the head. Fear is a healthy thing and should be embraced.  I'm a bit skeptical of investors who have high conviction in a idea and state they have no self-doubt or fear.  Its inhuman and emotionless. If you are a mere moral like 99 percent of us. Use fear as leverage in pulling the trigger only if your work says so and its a reality vs perception event based on numbers that make your reality. The  1 percent can be emotionless and inhuman.

 

All good posts.

 

I would recommend reading about the different parts of the brain and what the different elements are responsible for. For example our limbic system is responsible for the emotional part of your thinking, fear included. This part of the brain is responsible for self preservation, fight or flight tendencies, and emotional hijacking. "Does it eat me or do I eat it?" is what this part of the brain processes, and we should be thankful it is located at the base of spinal cord. This allows for a quick response.

 

Today most threats are not physical threats but psychological threats however this part of the brain is unable to distinguish between the two. This part of the brain also becomes fused at the age of two and stops developing. That is. Why you can be 2, 42, or 82 and still have an emotional meltdown. If the fight or flight response is strong enough it will result in an emotional hijacking in which the cortex is flooded with hormones and the rational portion of our thinking is rendered useless. This happens countless times in the workplace and the home when someone threatens our ego. Often it isn't till after the chemical response has subsided that you will be able to think rationally and reflect on how irrational your behavior was.

 

The consequences to investing is numerous, however patience and emotional intelligence/awareness are key. There are numerous books these subjects for those interested. Just remember emotions are not tools of cognition, but they likewise shouldn't be repressed. I believe people are "wired" differently and thus WEB is an anomaly. That said, new neural connections can always be made in the brain, however one needs to greatly develop their critical thinking ability.

 

Thank you for sharing.  Awesome post.