Investor psychology in times of crisis | Lessons learned

“Fearful when others are greedy and greedy when others are fearful.” – Warren Buffet

The last week has been an interesting view on my own psychology, on how all the best-made plans aren’t worth anything if you don’t have conviction and resolve. Fintwit talked about keeping a trading diary and here is my attempt to keep myself intellectually honest!

I am not a trader. I strongly believe that on a really long term horizon stocks will outperform every asset class. I also believe that the best opportunity to purchase assets is when everyone else is scared. In my lifetime I’ve seen two recessions – dotcom and GFC. I had just started my career during the dotcom boom and didn’t know anything and right before the GFC, we bought a house (great timing right :). So never had any cash to capitalize on the downswings in markets. I’d always thought that in the next downswing, I will be prepared and buy in-size!

I’ve given up on buying single name stocks and only invest in index ETFs and one, in particular, VOO – the S&P index ETF from vanguard. You really can’t beat this ETF, its just 3 basis points in fees! My general rule of thumb was that if VOO drops by 5% start watching and if it drops 10% time to start buying. You can skip the below if you want the TLDR, just head to the end of the post to see learnings!

Feb 19, 2020: VOO hits all-time high at $310.92

Feb 25: VOO close at $286, an 8% drop from ATH. Is it time to buy? I’m now watching this every hour.

Feb 26: Open at $287.26. Classic bargain hunter behavior, it is going up! I’m going to miss the bargain. Start buying, order filled at $287.33. Close at $286.07. Feel ok at the close, it is not that off than my fill price. The mood is good.

Feb 27: Open at $279.26. Ok not that bad, let us buy some more but trim position size, worried about catching a falling knife 🙂 Fill at $278.05 at .25X size of the initial position. Close at $273.39. Ok, so I’m out $6 but on a smaller position. Apprehension beginning to creep in

Feb 28: Open at 265.08. Hmmm, on one hand, apprehension, on the other hand, bargain? We are now 15% off ATH. Fill at $263.35, still at .25X of initial position – not ready to buy in size yet. Close at $271.74. Feel like a goddamn genius. The position is up, maybe this is the reversal. Time to wait and watch

Mar 6: Open at $268. All right, time to go back in size. Fill at 266.75 back at the original size. Close at 273.19. I feel like a GENIUS! Its the weekend all is great with the world.

Mar 9th: Monday, whoa shit has hit the fan. VOO open at $252.72, that’s a big drop from Friday’s close. Fear begins to creep in. Fill again at $253.20 at .25X of the initial size. Close at $252.11. Now what? Lots of emotions today, how low can it go? Is it time to step away or to go back in size?

Mar 10: Open at 260.48. Hmm, okay reversal again? I want to feel like a genius again, the bargain mindset took over again. Fill at $255 at the initial size. Close at $263.81. Genius feelings return. So far it looks like I’m timing the upswings ok, trimming position sizes correctly.

Mar 11: Open at $256. hmm WTF is going on. Let us follow the same strategy that worked. Fill at $250.56 for .25X of size. Close at 250.73. Don’t know how to feel at the end of the day. Volatile mood in the last few weeks. Trump does his travel ban press conference in the evening. No fiscal stimulus announcement. Feel a pit in my stomach – its all downhill from here – there is carnage coming tomorrow ???

Mar 12: Mayhem in the morning, open at $234.94. Getting sick of this volatility. Put a hail mary order at $229. IT GETS FILLED. That’s it, I’m out – my resolve is broken.

“Everybody has a plan until they get punched in the mouth.” – Mike Tyson

So what did I learn?

Saying you will buy in size in times of crisis and actually doing it are two very different things. It’s all about your emotions and how you can handle volatility. I’ve learned that what I thought was my volatility tolerance (higher) was very different than my actual risk tolerance (lower). It is absolutely true that the one person we lie to the most is ourselves!

Position sizing does work. At the end of the day, as it stands today – I’m down 5% on the new purchases since Feb 26 even though the price is down 13%. So at least I’ve got one strategy that works. Now to work on my emotions!

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