The Warren Buffett Spreadsheet – Stock Valuation & Analysis

11 habits and strategies for reducing investing stress

 

In investing we are our own worst enemy. Researchers have found out that we make many behavior mistakes when investing our money. We become irrational and make silly decisions. This behavior is because of our lizard brain that acts fast in situations where we feel fear or stress. This behavior helped us survive and thrive on the african savanna, where being fearful was beneficial for survival. However in the stock market, we need to tame that part of the brain if we want to reduce stress and get a good return on our investments at the same time. What worked on the savanna does not work in the volatile stock market! Remember that Warren Buffett said that temperament is more important than high IQ in investing. I agree I think controlling our own behaviors and limit our mistakes is at least 50% of becoming a better investor. I think this topic is often ignored in the investing world, where most of the focus is on which stocks to pick and when to buy and sell, and not how to behave.

In this article I will share my collection of different habits and routines you can incorporate to tame your inner monkey. These suggestions come from different books on behavioral finance, my own habits and mental models. I also think its more important to focus on behaviors to avoid rather than behaviors you want to have. This idea I got from Nassim Taleb’s concept calles via negativa in his book Antifragile.

 

1. Know yourself before you choose your investing strategy
We have a different personalities and investors should find an investing strategy they are comfortable executing. I recently listened to Monish Pabrai and Guy Spier discussing this topic and Guy Spier said that he and Monish had different volatility tolerance. Guy would get uneasy with Monishs’ strategy of a concentrated portfolio and a high volatility and would probably not be able to successfully execute a strategy like this with his type of personality. Guys portfolio has more stocks and it’s not that concentrated as Monish, hence lower volatility. Both strategies works, but you want to find a strategy that fits your personality and that will limit your stress the process. If you are not willing or have interest in analysing stocks I would recommend index funds, instead of trying to pick your own stocks. It’s important to know the limits of your expertise and knowledge.

 

2. Never invest with money you will need the next 5 years.
Never invest money in the stock market if you know you will need them in the near future. You can never know or predict the short-term returns in the stock market. If you are forced to sell off stocks to cover your need for money you will expose your self too much unnecessary stress and worry. Also keep enough cash in your liquid bank account to cover your bills and living expenses for at least 3 months, before considering investing in stocks. You need to increase your robustness before you expose yourself to risk.

 

3.  Do not check your portfolio statement unless you must buy or sell a stock. 
The less often you check your portfolio the better return and the less stress you will feel. The reason for this is that our amygdala reacts with fear when we see and experience losses. That include financial losses, even if they are not realized losses. The research shows that we feel more than twice as worse seeing a loss than what we feel when seeing an equal amount of gain. And from day-to-day the returns on your stocks in your portfolio is very random, it’s around 50/50 chance of the portfolio to show either a loss or a gain. So that means if you check your portfolio every day you will feel the losses twice more strongly than the gain. That means that even if you over time has a positive return over the longer term, being exposed to the days with the negative returns will far outweigh the positive days, potentially making you feel miserable even you will get a good return over the long-term.

Another effect of checking your portfolio frequently is that it can lead to over-trading. And trading cost trading fees and taxes, which is a negative drag on your returns of the longer time. Research showed that on average the investors with the best long-term returns on their portfolio where the one that had forgotten they had a portfolio!, and people who had deceased!. That says something about the benefit of limiting the exposure to your portfolio statement. There are no need to check your portfolio or stock prices frequently if you are a long-term investor. What happens on a daily, weekly or even monthly basis is just noise. Companies does not change this fast. Meaningful changes in companies happens quarterly and annually. That’s why exposing yourself to randomness and noise has no purpose.

How to check your portfolio less frequently?
– Buy and sell stocks less frequently
– Do not check your portfolio unless you must buy or sell a stock.
– Make an automatic price alarm on the stocks that you already own. If one of your stock reach the buy or sell target you can act, in the meantime you will not need to check the prices frequently. Gurufocus has a good tool for that.
– Remove portfolio tracking tools on your smart-phone and your computer.

 

4. Avoid being exposed to frequent news about the stocks you own
Most investors want to follow the daily news stream on the stocks they already own. The problem with this is the same as with the changing stock prices, most of the news is just noise and not a signal you should act on. Being exposed to the news will give you the feeling of urgency and the wanting to act, that is buying and selling too frequently. This also applies to daily indicators that has an effect you your stocks. It can be oil prices, iron prices, freight rates etc..

I think exposure to news about your stocks will have a similar effect as checking your portfolio statement will have on you. A stock will have its 50/50 percent amount of positive and negative news. However you will feel twice worse about the negative news than happy about the positive news. Sometimes ignorance is bliss, especially in investing.

My advice is to only check the news about your stocks on a monthly or even quarterly basis. Remember the most important news about your stocks are the financial statements from the companies, not the frequent speculations by people on how stocks in your industry will perform the next weeks and months. A quarterly or even annual review of your stock should be just fine if you are a long-term value investor.

I am at the opinion that your return will come from picking great stocks and holding them. So that means after you have done your research and bought a stock 90% of your job is done! You should get your return from initially having picked a great stock, not from timing your selling of the stock. After buying a stock you should be less interested in tracking this stock (your decision has already been made), and instead focusing your time looking for new stock ideas.

 

5. Buy and sell stock less frequently
You only need a few really good stock ideas in your whole investing life to get an outstanding return. It’s stressful to constantly buying and selling stocks, because you will always have to find new ideas. Really good ideas are seldom and if you find 100s of ideas per year you are doing something wrong. A better approach is to try to find only 1-2 great ideas per year. Stocks that you are the most confident about. Be patient, sit on your ass and wait for the great opportunities. There should be no rush in investing. Be comfortable doing nothing for long periods of time.

 

6. Avoid frequent exposure to stock forums and message boards discussing stocks

It can be addictive to read other people’s opinions on stocks you also owns, however
On many of these forums you have no idea about the knowledge level of the participants, their motivation for what they are saying, how correct the information is and their skin in the game. Most of the talk on these forums are noise,  short-term thinking, speculations and potentially fear inducing.  I recommend you to either not using them at all, or check them very infrequently. Maybe in your initial research of the stock, when you want to gather information about the company, but not much after you have bought the stock. Remember you will be correct if your analysis of the stock is correct, not the opinion of other people. You need to be independent in your research.

 

7. Never borrow money to invest in stocks
Leveraging your portfolio will make you fragile and increase your stress levels. Your return can of course increase, but your risk will also increase. You will have to pay interest on the money your borrow which is not pleasant.

 

8. Never short stocks
Mathematically shorting stocks does not makes sense. When you go long a stock the potential upside is unlimited. When shorting a stock the potential upside is only 100%. Also the long-term stock market return is positive and stocks tend to increase in value and price over the long-term so shorting stocks is a poor strategy and it will likely increase your investing stress. You will never be able to predict the gyrations of the stock market, and you might in the end be correct about your short, but in the meantime you will expose yourself to a theoretically unlimited downside, and maximum 100% upside. You will also never know for certain that if the company you are shorting is getting bought out at a higher price than what you have shorted the stock.

 

9.Turn off CNBC and other sources of financial news
This type of news is mostly useless noise. It’s about macro issues and politics which are nearly impossible to predict and it’s also not easy to have an informational edge, because you have an army of other economists and people who also look and analyse the same data. Your edge is knowing the micro side of the business, not the macro. The people talking on these financial news channel are trying to predict the future of the economy (which they can’t) and they try to come up with reasons for every uptick or down-tick in the market. You will be much better off reading companies annual reports and learning deeply about different businesses than reading or watching financial news.

 

10. Accept that you can’t control the outcome of your investments, only the process.
You need to accept that investing is not pure skills like chess, but also have a portions of luck and random events that you can’t control or predict. You should focus less on the outcome, especially in the short-term and rather focus on having a good and disciplined process. In the short-term your returns can be poor even if you have a good process and decisions. However in the long-term a good process will give you more good outcomes than bad, and your returns will likely be good.

 

11. Cultivate a healthy lifestyle
Sleep enough, exercise, eat healthy, go for walks in nature, meditate, read good books, spend less time online, limit your exposure to useless information, take frequent time off from investing related activities. No explanation needed.

 

Hope this article gave you some ideas on how to behave more smart in the stock market.

What are your recommendations on strategies for reducing investing stress ?

 

My behavioral finance book recommendations:

1. Misbehaving: The Making of Behavioral Economics

2. The Little Book of Behavioral Investing: How not to be your own worst enemy

3. Inside the Investor’s Brain: The Power of Mind Over Money

4. Seeking Wisdom: From Darwin to Munger, 3rd Edition