Managing investments successfully requires a detached approach. To outperform the market in the long term, it is imperative to maintain emotional composure and dispel the notion that volatility is synonymous with risk. Additionally, exercising caution is crucial, particularly during times of apparent stability. The recent series of events, encompassing a global pandemic and conflicts in Europe and the Middle East, serves as a reminder that unexpected occurrences are inevitable.
Unemotional investing during wars and calamities
The outbreak of war in Israel on October 7th, 2023, resulted in a notable decline of more than 6% in leading stock indices the following day. In the subsequent three weeks, my most significant investment saw a decline of close to 40%. Mind you, I strategically selected this company for its capacity to withstand challenging situations, ensuring continued business operations and cash flow stability regardless of economic fluctuations.
In times like these, our amygdala becomes excessively active, as our brain fails to discern between the threat presented by a bear in the woods and the possibility of financial loss. In such scenarios, we are left with three alternatives: Sell [flee], do nothing [freeze] or buy [fight].
Throughout the ongoing market declines, I kept purchasing additional shares. Following the stock’s lowest point in late October, it has since increased in value by approximately 100%. Although the future behavior of the stock remains uncertain, my current strategy has proven more favorable than selling off. Alternatively, simply holding onto the investment and weathering the storm would have yielded satisfactory results as well.
The main point to understand is that volatility should not be mistaken for actual risk. Rather, volatility is a manifestation of the sentiments of the market participants towards a specific asset at a specific point in time.
Know what you own, and why you own it
Unemotionality alone does not guarantee success in the investment management field, but it certainly holds significant importance. The ability to remain composed, coupled the insights derived from thorough research, plays a crucial role in effectively maneuvering through complex market conditions. Instead of dancing in and out of the market and buying companies one does not understand, it is essential to possess a deep understanding one’s investments. Particularly during times of impending chaos, it is imperative to be well-informed about our companies.
Know thyself ; know thy enemy
Risk arises from a lack of understanding. Overdiversification can help mitigate non-systematic risk, but it is not the path for superior returns. An investor’s greatest enemy is in fact himself. Most often than not, one’s emotions and overactivity stand in his way to achieve superior returns. It is crucial to recognize and control the irrational behavior influenced by emotions.
As Sun Tzu wrote [Art Of War]:
”If you know the enemy and know yourself, you need not fear the result of a hundred battles..”
