Dealing with Investor Emotions: Anxiety Induced Hyperactivity

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slowtraveler
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Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by slowtraveler »

How do I stop making shifts at the worst possible times? How do I stick to a single asset allocation and find peace at that to let it make me the money?
Last edited by slowtraveler on Sun Nov 08, 2020 2:08 pm, edited 1 time in total.

jacob
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by jacob »

Standard recommendation would be to keep a log writing down the rationale for why you bought a security or a portfolio in the first place and what you expect the outcome to be. The outcome can be a certain price evolution, a rate of change, a hedge, a new market environment. Also write down how confident you are, the level of your conviction.

That's the decision part of the process.

Once you sold, you write down the outcome of the trade. Then you compare.

Humans very often evaluate their decisions based on their outcomes. E.g. betting on a horse or a stock, seeing it lose, and concluding that they made a bad decision. However, it might be that they actually made a good decision but were just unlucky. The opposite certainly also holds. Humans make a bad decision but have a lucky outcome and conclude that they're geniuses.

You can't do anything about luck, but you can figure out how to make better and better decisions. The trading log is one such tool.

Also read:
https://www.amazon.com/Way-Turtle-Metho ... 07148664X/
https://www.amazon.com/Thinking-Bets-Ma ... 078SBSBW3/

7Wannabe5
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by 7Wannabe5 »

@jacob:

Do you think it is better when you are starting out to try out a lot of different strategies for small stakes, while keeping track as you indicated? Also, do you directly apply Bayesian Analysis?

jacob
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by jacob »

No and no.

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Seppia
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by Seppia »

There is no "perfect" asset allocation (except in hindisght). The "correct" asset allocation is the one that will help you sleep at night and consequently NOT change strategy too often.
Most investing mistakes are due to action, not inaction.
So the standard rule I live by is "in doubt, don't do shit". It saved me many times

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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by jacob »

@Seppia - Yes, this post is also relevant to investing.

http://earlyretirementextreme.com/can-y ... -fast.html

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Bankai
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by Bankai »

Seppia wrote:
Fri Sep 13, 2019 7:14 am
Most investing mistakes are due to action, not inaction.


Yes, but... cost of inaction is often higher. Consider all those people who watched their only holding (100% NW) going all the way down to zero.

Nomad
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by Nomad »

I've tried a few things. I tried individual stocks and I panicked when they went up or down.
Then I tried stocks with information from Stockopedia, that was much better but still, I didn't have the personality for it.
Then I did fixed asset allocations of funds and ETF's but picked the funds via a fund screener - which was better for me.
Now, I'm half in two excellent global funds and half is a timing strategy based on the performance of asset class in the preceding 3 - 6 months.
I check the market once a month and make any necessary changes.

However, there a lot of information sources available now online and I believe everyone needs to manage their own finances and needs to learn
the game sufficiently well if they intend to live off their assets for the remainder of their life.
A crucial part of a strategy is backtesting with historical data - as much as is humanly possible.

Jason

Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by Jason »

I recently did this with a beaten down stock I owned that I was waiting to get back to my original buy point. The second I was made whole, I sold the stock and bought something else. The stock I sold went on a tear and greatly outperformed the stock I bought.

Regret in investments, as I see it, comes in three forms:

(1) Not buying a stock;
(2) Buying and selling too early;
(3) Buying and selling too late;

In my experience, by far, I have hurt myself with #2. #1 hurts the least because it is purely speculative i.e. I should have bought Netflix etc. #3 is usually lesser gains as opposed to a complete tank job.

I don't see it as asset allocation, I see it as JLF said, "Why did I buy the stock in the first place." Most companies that have staying power go through cycles. The worst comments I see on stock trading boards are "This money would be better used somewhere else." That is not investing and I fell for that line of thinking. Now in the long run, maybe I made the right decision. I don't know. But if I did, I made it for the wrong reasons. And that eats at my soul because I knew better.

Edit: When I first started on line trading, fees were close $9.99. Now they are in half. I think this has hurt me. That additional fee kept me more wary of the peril of hyper trading.

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Sclass
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by Sclass »

A friend of mine had some really good advice. He’s a master stock trader and happens to be a very good electrical engineer and computer scientist. He used to say if you hit compile and your code compiles and you don’t get any error messages you’re not pushing things hard enough.

I try to apply this to my investing. When I started out, or for the first ten years or so, I’d recoil at the thought of losing money. It may have actually felt worse than experiencing an actual loss.

Then I started getting more daring. I made money and lost money. I had some bad outcomes when I lost half. That changed especially when I found out how easy it was to make it back if I kept trying and kept being daring.

I like the Taleb question which do you prefer?

1 make a million.
2 make two million lose a million.

Everyone wants one. I’ve never been able to do anything but two. I think it has to do with a statistical sweet spot I’ve wandered into. If you’re trying to hard to be perfect you don’t win enough. If you gamble too hard you get wiped out.

And so I’m left with the occasional big loss. And it is painful psychologically. I’ve gotten better at taking it with seasoning. But as I look back, it was necessary to go through all this to get to where I am. And I am in a good place.

Not the best place I could have been. I lament some of the big winners I gave up on. I usually don’t regret the losers I cut my losses on. But I try not to worry too much about water under the bridge. I comfort myself by thinking about how little I started out with and where I am now...not where I’d be if I’d made perfect choices for the last twenty five years of trading.

I never thought about commissions much. I used to pay $25 a trade when I used a phone (like “press one to buy press two to sell” ) to buy stocks. It was chump change. I would pay many times that to have a shot at pressing those keys again.

Jason

Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by Jason »

I linked this in another thread but what the hey, I got a lot out of it:

https://www.fidelity.com/viewpoints/inv ... t-strategy

The basic premise is master of your domain. And forget about economics. Lynch, Buffet, guys like them, seem to have attributes you see in great athletes and artists who can focus on performance despite the noise in the stadium.

IlliniDave
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by IlliniDave »

I've done well executing a lot of foot-dragging and "thinking about it" after being invested. Interestingly, I think one of the more common behavioral errors is too much foot-dragging and "thinking about it" before (or in between) being invested.

That's not to say I don't ever change things. But most significant changes, actually all I can remember, were ultimately prompted by changes in my situation rather than by changes I perceived out in the financial landscape.

I've gotten pretty good at shaking off all the woulda-coulda-shouldas. It also helps that over time I've learned to make the goal of the game simply to do well enough to support my overall life goals (the stash serves me, I don't serve the stash) instead of gaining the highest total over a given time increment. For me that translates to, roughly, "Just don't screw up".

Tyler9000
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by Tyler9000 »

@slowtraveler -- I can't help but notice that your post mentions "underperformance" or "outperformance" multiple times. So it strikes me that a big contributor to your core frustration is your insistence on always comparing your investments to some sort of benchmark rather than simply being happy with their independent performance. That's one reason why I spend a lot of time making charts showing the returns for every investing period of a portfolio. Compare an investment to itself rather than to an arbitrary outside benchmark, and in my experience normal market noise will be easier to identify and accept.

Peanut
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by Peanut »

Sclass wrote:
Fri Sep 20, 2019 8:01 am

I like the Taleb question which do you prefer?

1 make a million.
2 make two million lose a million.


I lament some of the big winners I gave up on. I usually don’t regret the losers I cut my losses on. But I try not to worry too much about water under the bridge. I comfort myself by thinking about how little I started out with and where I am now...not where I’d be if I’d made perfect choices for the last twenty five years of trading.
I like this a lot, is it from one of his books? I prefer 2 because you have proven you can make two million whereas 1 is half as significant an achievement. As for the loss, well, everyone makes mistakes right?

I also regret big winners way more than losers. In fact I usually follow a conviction loss philosophy. I make profit or watch the stock go to zero... and have, on several occasions. I like to think I welcome the punishment for my mistake.


As to OP: It seems to me your time horizon for making a judgment about your shifts is a bit short. Sure you missed a bump up by a week or whatever but what will the picture look like a couple years from now?

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Sclass
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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by Sclass »

Yes, it is from one of the books. I cannot remember which one. Maybe Fooled by Randomness or the Black Swan.

I’m really struggling with this one right now. I’ve done well as an investor. But I have lost a lot of my paper gains. It is pretty much the Taleb scenario.

I joke about this quote all the time. But honestly I’m there and I feel the pain. It is a very real emotion.

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Re: Dealing with Investor Emotions: Anxiety Induced Hyperactivity

Post by jacob »

Professionally speaking, getting 1M in a smooth manner is much better than getting 2M and losing 1M. The way performance was gauged was to squint at a P&L curve (real or simulated). The desirable form was a non-volatile line going up. The Sharpe ratio (it's volatility-adjusted overperformance) is meant to reflect this. The reason is that a smooth curve can be leveraged. If you leverage a jaggy curve, you're likely to be stopped out---which is terrible.

I suppose from a retail perspective, there could be an edge in doing the opposite since there's less street competition. I prefer to sleep well at night though---the amateur equivalent of not getting fired.

Add: If this is Taleb talking, there are probably some thoughts about the tails of the swing being overpriced or underpriced.

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