Zoom Out

It’s an easy game, if you control your emotions.

Warren Buffett

It’s been an absolutely dreadful year thus far in financial markets. What a contrast to just one year ago. My portfolio hit another YTD low on Friday, down almost 40%. Losing money feels awful, even if it’s mostly “unrealized.” Almost every investor looks at historical drawdowns pretty dismissively, thinking “that was a great buying opportunity!” Living through them, however, is quite different, as many including myself have realized. Bear markets weigh on psychology. It’s quite demoralizing to see what was become what now is. Why didn’t I sell more when there were “obvious” signs of exuberance? What was I thinking buying at those levels? Am I even good at this?

But today, my last living grandparent died. Suddenly, things come into perspective.

She, along with my extended family, live in Canada, so my family and I don’t get to see them often. Fortunately, we scheduled a trip to see her last weekend, for the first time since the pandemic. She was not really able to be too present. Blind in one eye, deaf in one ear, lymphoma lumps in her throat so she couldn’t really speak. Or eat. Still, she made it to one last family gathering. Canadian thanksgiving.

Right before heading to the airport to fly back home, we went to her bedroom to say goodbye. In a daze from morphine, she looked up briefly. And then, to my surprise, lifted her arm to wave to us. At that moment, I immediately seared that scene into my memory. No picture. Just a memory. The last time I’d see her, captured in my mind forever.

What also comes to mind is: you never know when it’s the last time. The last time you do something. The last time you see someone. The last time you talk to someone. Although I knew it would be the last time I’d see her, I’m unaware of other things that could be my last time. Make each moment appropriately memorable.

As sad as it is, she was 93. I hope I live until I’m 93. She had a remarkable life. She was a part-time special-ed teacher and caretaker. She was mostly in charge of taking care of her four incredible children. Who, in her final months, reversed their role. Over 20 years ago, she was severely injured in a car accident, which also killed her husband. I was too young to remember, but there are pictures of me and my family by her hospital bed. She persevered for her grandchildren. Death, paradoxically, provides an opportunity to celebrate life.

If you know me as a person, I can’t help but tie almost everything back to investing. It is, after all, a pursuit inextricably linked to who we are as human beings.

In no way is death remotely comparable to losing money in markets. But that’s sort of the point. Worries one day can be inconsequential the next. Everybody must deal with grief, and do so in their own way. Coping with suffering is an age-old tribulation. But humans persist through hardships, whether professionally, such as getting laid off, or personally, such as a breakup. Failure is required for success. Emotional highs cannot be highs if not accompanied by lows. Volatility is a feature of markets, not a bug. Death is a feature of life, not a bug.

How you react to difficult times defines your story, not the difficulties themselves.

Markets partied in 2021, aided by alcoholic-esque stimulus. Friendly reminder, alcohol is poison. Was it not relatively predictable that we should experience an economic hangover? To be fair, that involves a bit of hindsight bias, and begs the question “oh if you’re so smart, you must’ve positioned for it then right?” Nope! I did write that “It should be well understood that monetary policy cannot independently generate inflation. Stimulative fiscal policy, on the other hand, might.” But, “forecasting inflation… is impossible and useless to speculate on.” I still stand by that. Furthermore, my investing style is not macro, nor playing market gyrations or sector rotations. I prefer to invest in high-quality businesses that can weather any economic terrain.

If the Fed needs to raise rates enough to stem inflation (which I’m not sure is as coherently straightforward as most people make it out to be because economic interrelationships are complex and offsetting, but the gist of it generally translates) and markets decline as a by-product, so be it! Their mandates are price stability and full employment, not financial market stability and corporate profitability.

Owners of capital have benefited immensely from years of “easy money” monetary policy. Where were the investors saying “this isn’t right I’m making so much money!” It seems inconsistent to blame the Fed for reacting to economic conditions now, while not crediting them for boosting economic conditions previously. Some would argue they didn’t act fast enough. But who could’ve foreseen Russia invading Ukraine and the implications on commodity markets, or the impact of the evolving Covid strains and China’s zero-tolerance policy, or the supply-chain issues, or the reaction function of consumer demand amidst it all, etc.? Economies are complex systems.

Furthermore, of course the Fed is reactionary. Imagine if they were predictive! “We believe inflation will be higher than our target next year so we are raising rates now.” What would market think of that? “They aren’t being data dependent! They think they know what will happen!” Oh, so, just like you, Mr. Market?

People with the privilege of accumulated savings have the privilege of putting those savings in risky assets. Even “risk-free” US Treasuries aren’t “price risk-free.” You will get the yield you invested at if held to maturity. If you chose to invest at low yields, that was your choice. Similarly, if you chose to invest in companies at high valuations, partially predicated on low interest rates, you must live with the consequences of those choices.

End of mini rant.

The point is, sorrows happen in all aspects of life. As an investor, it should not come as a surprise that you also experience misery in markets from time to time. If investing wasn’t risky, there wouldn’t be an opportunity for returns. By far the largest influence on whether you can actually capture those returns, is how you handle it emotionally. Do you let markets break your spirit? Break your joy for the game? Break your process?

I sold stocks in August predicting the market would continue dropping. Something that I rarely do or think about. I’d become increasingly despondent. What I realized today, is that I need to re-frame my mindset. I mustn’t lose track of why I love this game. My “edge” so-to-speak is behavioral. I play the long-term game. Yet, here I was, thinking about where the market was going to go next.

Valuations have corrected to relatively average levels, and in a lot of cases to historically cheap levels. That’s exactly what happens when people become fearful. Need I mention that investing when fear is pervasive has a much better track record than investing when optimism proliferates? That said, fundamentals in the near term may not be as rosy as currently projected, but that’s why resilient and competitively advantaged businesses outperform over time. In the same way that covid disrupted business models and accelerated trends, I believe this disruptive period also provides opportunities to find babies thrown out with the bathwater. For an investor with a long term time horizon and the right temperament, volatility is a gift not a curse. I will be buying stocks this week.

The reasons I titled this piece “Zoom Out” are threefold. To remind myself that:

  1. Financial markets are risky and require emotional and analytical prowess. Don’t play the game if you can’t handle it.
  2. Returns over a short time period can be jarring and impactful, but the focus should always be on the long term, especially during temporary despair.
  3. Financial market volatility is not all that different from real life volatility. A gut punch should remind you what is important: relationships and your mentality through the ups and downs.

Zoom out to see the bigger picture. Life is a gift. Being able to invest is a gift. Matching the S&P over a three year horizon despite the YTD drawdown is not bad. Buying great businesses at depressed prices is what leads to higher returns. Focus on the process. Sit with your feelings. Understand your decisions are made in an emotional context.

This too, shall pass.

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