I went through a meditation course and took notes of my progress for several weeks in 2019, which taught me to look at myself, my actions and feelings from aside as a separate person. It made me aware of so many emotional states I was experiencing while making trading decisions or placing orders.
When I finally understood what was going on and accepted that I had no control over the market, I felt like I had come out of the matrix and was able to notice all the bs the brain goes through when there’s a lot of money at stake. Being uncertain about a decision, afraid of losing money, double checking all the information available, reconsidering the action, fearfully pulling the trigger, deviating from the inital plan etc. It’s all in the head and has nothing to do with the markets.
I often hear that this time it’s different in terms of the old strategies have stopped working, there’s no money to be made, AI will overtake investing.. Such stories have always been there. It really pays to read history. As long as people are involved in the markets, it’s not going to change. People will want to buy the lows and sell the highs all together while being amazed how well the market index works, not realizing the index does just the opposite! That’s why it works so well. Imagine the index throwing out the largest stocks and buying more the ones that are going bust. In my world, it’s called the disposition effect. Some call it value investing.
Fill the holes in equity curve
I picked the chart of Dow Jones Industrial Average since 2000 to illustrate the point of reducing drawdowns and letting compounding do its magic. The idea is to find a way to avoid or compensate these orange holes during the ride so that a -50% drawdown doesn’t kill compounding. Otherwise, you’ll lose a big chunk of the portfolio and then need to wait in some instances for several years for it to recover to the point you were left off. Time is money in investing and waiting for years to get back to even is what kills the compounding effect.
If I put it into numbers in my quantitative analysis, the picture becomes as clear as a day – one needs to protect the downside to grow wealth in long-term. People will say that the market will always recover and that’s true, it’s just that it may recover without you. There are always people left behind after a crisis who won’t be benefiting from the next boom. Do you think that people who lost their homes in 2008 crisis, were the ones to grow wealth in the bull market of 2009 – 2020?! I don’t think so. Most of them probably never wanted to hear about the markets again. It’s like the world always moving forward after a war or pandemic, just without the people who got killed. There will always be a lot of new investors in every new up market who haven’t experienced a crisis in the markets and will soon find out what it’s all about.
History rhymes and not everyone will survive
I’m keeping a positive mindset, but need to be honest and prepared. All the mental practice over the years has trained my mind to spot bs better and understand how biased humans are. There’s just so much noise about the markets, macro, technicals, fundamentals, interest rates, predictions etc. Letting it all go and focusing on my own process has made all the difference. People making money in the markets are quietly cashing in, not trying to be loud and smart. Being consistent with what works and outlasting everyone else are the key steps to long-term compounding of wealth. In reality, investors are jumping from one idea to another trying their luck in chasing performance, but luck will always be temporary.
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