Do You Have What It Takes?

Can you stay coldly rational in the face of utter insanity?

Markets can remain irrational longer than you can remain solvent.
John Maynard Keynes, Nobel winning economist (1930)

Pictured: Damian Lillard hits a stepback game winning three pointer to eliminate the Oklahoma City Thunder from the NBA Playoffs. I’d say he can stay coldly rational in the face of insanity.

Can you stay coldly rational in the face of utter insanity? Do you have the sack to defy the masses and stick to your convictions even when the entire world says that you’re wrong? Most studies would argue that people fold easily under pressure, and are the farthest thing from being coldly rational. Yet, there are a few in this world who do consistently rise up against injustice and stick to their convictions. These are the investors who go down as the greats, with market returns that make the rest of us salivate.

When the chips are down, these, uh… ‘civilized people’? They’ll eat each other.
The Joker (2008)

If you don’t have an appetite for risk, then the market isn’t for you. A core premise of finance is that by taking on greater risk, you will be compensated with greater return. Therefore, over the long run, riskier assets are likely to outperform less risky assets as compensation to the person who’s bearing the brunt of the asset’s volatility. In theory, you should seek out as much risk as possible within your portfolio in your early 20s. Yet, theory and practice are two very different beasts.

Stocks will outperform bonds over the long run, but do you have what it takes to withstand the short term gyrations? The investor graveyard is filled with those who have tried and failed.

As long term investors, we shouldn’t care what happens to the market in the short term, but the reality is, we do. We are humans – we aren’t coldly rational. If you are coldly rational, then maybe you should consider playing Patrick Bateman in the next American Psycho, because you’re definitely f*cked in the head, and probably a psychopath.

There’s a cost to being coldly rational. Are you willing to give up a piece of what makes you human to achieve better returns?

Nothing is free in life, and you’re paying for your higher returns with some crazy fluctuations in asset prices along the way. Over the short term, will you be able to handle the pressure? Do you bluff jam the river when you have jack shit, or do you fold? In March 2020, the S&P 500 dropped over 30% – one of the worst routes in market history. If you had $100,000 in the market during January 2020, your portfolio was down to about $60,000 by late March.

Coronavirus Lockdowns March 2020: the S&P 500 faces one of its sharpest, most sudden declines in history. The index declined over 30% in less than one month.

When you decide to save for retirement, you’re making a big bet on your future self. As far as life commitments go, this might be the biggest. 39% of American marriages end in divorce, but an astounding 92% of active fund managers trail the S&P 500.

Ask yourself, in March 2020 would you have sold your stocks in a panicked frenzy? Or would you have borrowed money to buy more stocks, at what turned out to be fire sale prices? I bought stocks the entire way down in March 2020. As a result, I earned returns over the course of that one year that most people would be happy to achieve in ten. But make no mistake, I was shitting my pants and questioning my motives that entire ride down. When you’re at the bottom of a market, the only thing that’s clear is that you’re down a hell of a lot of money, and there’s potentially a lot more financial pain coming your way.