I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Tuesday Book Club, I share an idea from a book.
In Mastering the Market Cycle: Getting the Odds on Your Side, Howard Marks writes:
[The] superior investor strikes an appropriate balance between fear (which is shorthand for risk aversion, dislike for loss, and respect for uncertainty and randomness) and greed (a.k.a. aspiration, aggressiveness and acquisitiveness). All people feel emotions, but the superior investor keeps these conflicting elements in balance. The presence of the two offsetting forces leads to responsible, wise and even-keeled behavior.
And later he continues with these points:
- Few people are always even-keeled and unemotional.
- For this reason, few investors are capable of staking out a midpoint position that balances greed and fear—and staying there—as more- and less-positive developments arise.
- To the contrary, most investors swing between being greedy when they’re optimistic and fearful when they’re pessimistic.
- Most swing to those positions at the wrong time—becoming greedier after the emergence of positive developments has caused prices to become elevated, and becoming more fearful after negative events have caused prices to become depressed.
The pendulum of individual, or market, sentiment is always swinging, Marks writes; it is “usually swinging toward one extreme or the other, first recovering from one psychological extreme—either too high or too low—and then continuing toward the other.”
Marks says he’s often asked “whether people can learn to be unemotional.” While he thinks people can watch out for emotional influences and work to limit their reactivity, he thinks “people who are inherently unemotional will have it easier. A lack of emotionality is a gift (in investing, that is, but perhaps not in other areas, like marriage).”
From an investor note he shared in January 2016, and quotes in the book:
One of the most significant factors keeping investors from reaching appropriate conclusions is their tendency to assess the world with emotionalism rather than objectivity. Their failings take two primary forms: selective perception and skewed interpretations. In other words, sometimes they take note of only positive events and ignore the negative ones, and sometimes the opposite is true. And sometimes they view events in a positive light, and sometimes it’s negative. But rarely are their perceptions and interpretations balanced and neutral.
Then he shares a cartoon he’s saved, calling it his favorite:
I’m finishing this blog post on Wednesday, not Tuesday of this week, and the cartoon applies. Yesterday the market was sad, and last Friday some people were asking, “is the AI trade over?” Today we’re in the green again after SpaceX reported an earnings beat, and less capex than expected.
The pendulum is always swinging!