To The Moon

The Stock Market is going through a pullback right now (a wave down, after a wave up) and if you are an investor, you are probably seeing a drawdown in your portfolio. How you feel and how you react to portfolio drawdowns will determine how profitable you will be in the long term. Here are a few useful psychological tips

1) No matter how great an investor you are, you will experience your portfolio value going through temporary drawdowns. Legendary investor Peter Lynch who achieved +604% return in his 13-year career (beating the S&P 500 by 3X) saw his portfolio drop 27% to 56% several times throughout the process. Even the most skillfull pilot in the world cannot avoid turbulence.

If you accept the fact that the temporary market declines and portfolio drawdowns are part of the investing journey and you have no control over when they are going to happen, you will stay calm and relaxed

2) Remember that the current market price of a stock does not always reflect the actual value of the underlying business. In the short-term, prices are driven by market maker manipulation, high Frequency Algo trading, forced selling by brokers on leveraged accounts, panic selling etc…

For example, in a market selloff, a high-quality business like Amazon (AMZN) may see its stock price sell 20% to 30% lower. However, the business itself has not changed. It’s making the same revenue, profits and free cash flow. Its intrinsic value is the same as it was a week ago. Intelligent investors focus on the value of the underlying business and not the temporary mis-priced manipulated stock price.

If you hold a high-quality business and crazy Mr market decides to sell it at 25% lower the next few days because he’s having a panic attack, you have NOT lost anything unless you are crazy enough to sell it together with him

3) Focus on where the value of your investment portfolio will be in 3 to 5 years (or more). If you are invested in HIGH QUALITY businesses, you should expect that your portfolio will double in value in 3 years (24% annualised) to 5 years (15% annualised). In 10 years, your portfolio should be 4X to 9X more than the value today.

When you focus on the destination, the temporary downs in price should not bother you at all. In fact, you should be looking at it as a chance to add more to your portfolio. When the pilot knows that he will eventually land at his destination, he does not freak out over the turbulence.

4) Your words affect your thoughts and your thoughts affect your emotions and actions. Avoid using words like ‘ blood bath’, ‘I lost $XXX”, ‘ Portfolio bleeding’. These words create negative emotions as they assume that you have lost something and that your investments are declining in value

5) Avoid saying ‘ I should have sold before the drop’. There is no way to consistently predict short term price moves in the market. By entertaining this thought, you will likely sell in panic whenever stocks start to dip down slightly or when a market ‘expert’ predicts a drop in the future. As a result, you will never stay invested in the markets long enough to compound your wealth.

6) Use temporary stock market corrections to add more shares to high quality businesses that you want to own more of. You can never predict how long a correction will last or when the exact bottom is. So, it is best to buy in small tranches to average in your position until it’s fully allocated into a well-diversified portfolio.

If you are already fully allocated and/or you have no more cash to deploy, IGNORE the temporary market price and go watch a movie on Netflix instead. Come back a few weeks or months later and you would have likely forgotten that a market correction even occurred.