Pressing the reset button

It is no secret that life can be challenging. There are weeks where everything you attempt turns into an epic failure. Morale is low and self-confidence is free-falling. For any investor, this is a toxic combination.

 

I had a challenging week both at home and at work. Here are some snapshots of my week:

• I bought over £3,000 worth of call options on Micron Technology. The company announced its earnings yesterday after-hours. They beat market expectations and the stock price soared 5% after-hours. Then, the earnings call started. The CFO mentioned that guidance would be slightly lower to take into account the Trump tariffs (amongst other things). The stock went from +5% to -7% in a matter of minutes. My call options – already severely down due to recent downgrades issued by investment banking analysts (often pricing in the same concerns) – have lost close 95% of their value. The expiry date is October 5, therefore leaving insufficient time to turn things around. This erases all of my gains from trading Facebook this year, including my +1,500% gains on Facebook when it tanked 20% after its last quarterly earnings.

 

• Until today, the pound has continued to strengthen. As my primary source of income is in US dollars converted in pound sterling on the spot rate of the 1^stof the month: this hurts. Sure, I have benefitted from this in the past and I also have savings in pounds and euro because I took the decision to edge my currency holdings since the announcement of the result of the referendum to leave the European Union. The volatility of the pound and the lack of visibility over Brexit, which impacts the housing London market, makes it difficult to invest efficiently. While I believe the hold and wait approach is the right one here, it is frustrating.

 

• Work has been busy with various business development and team events, which have made it difficult to spend time with my family and to exercise properly. This imbalance has also contributed to a growing sense of exhaustion. It’s hard to make good money when fatigue is preventing your mind from functioning at peak level.

 

• Spending time and helping out family when in need is extremely important. Yes, it won’t bring you closer to financial freedom and you won’t grow your net worth. Actually, you will have less time to study your investments. The distraction could prove costly if you fail to pay sufficient attention to the relentless news flow (tariffs, Brexit, London real estate etc).

 

• Friday night, I was on my way to Gatwick airport to take a flight to Spain. A train hit someone between East Croydon and Gatwick Airport, which led to a stoppage of all lines to Gatwick airport. No ETA on when the lines would reopen. I share a cab with another person going to Gatwick: traffic is horrendous and the driver zigzags in hope of finding a better route but when we end up losing more time. Finally, it costs us £80 to get dropped to East Croydon where we were able to catch one of the very rare trains slowly going to Gatwick airport. The fellow passenger missed her flight. Mine was later and ended up being significantly delayed.

 

Now is the time to press the reset button.

You often hear the saying “cut your losses and move on.” The idea is to forget your past (failed) investments and start from scratch with a more positive and reasoned outlook. While this may work for your investment portfolio, it is harder to implement for the rest of your life.

 

Why is it important to learn how to reset?

Resetting is meant to break a vicious circle: you take a few initiatives, many fail in a short amount of time. Then, you start doubting yourself, you are less bold in your future endeavors. As a result, they yield limited results, even if successful. You continue to doubt yourself, your self-confidence drops and you decide to protect what you already have. All future opportunities are now immediately ignored.  Growing your income and net worth becomes a lot harder with such a mindset. I am exaggerating on purpose but this really happens and it’s up to each one of you to break the spell.

 

If the benefits of resetting are so obvious, why is it so difficult to achieve?

There is a bit of human psychology at play. While I am no expert, I know that the following makes it harder to throw in the towel and press the reset button:

 

1. The sunk cost fallacy: you have invested time, energy and money in a project. The project is not going as planned and is even making miserable. You consider quitting but now you recall all the time you put into it and are having second thoughts about quitting. If you are no longer happy, staying on is unlikely to make the project more successful. In the meantime, you continue investing time and resources, which will just make things a lot more difficult when you are forced to quit.

 

2. Being too optimistic: investing is hard because even if you are right, you can end up being wrong if the market disagrees (and, no, markets are not always efficient). It is a fine line between being a contrarian and being outright delusional. Micron is a company that now trades at less than 4 times P/E. in other words, it is a cheap stock based on its earnings. It is also a tech stock to some extent, so you have the best of both worlds. Yes, guidance might be disappointing, but even with a P/E of 5 or 6, it is still a better deal than Tesla, Netflix or even Amazon. Yet, nobody cares. If there is no momentum, you can be right that this is a buying opportunity but if the market isn’t with you (i.e. momentum), then you are still wrong and will bleed money.

 

3. Intermittent reinforcement and FOMO: intermittent reinforcement is a psychology term. B.F. Skinner is a psychologist who developed the theory of operant conditioning: a behavior can be determined by its consequences, reinforcements or punishments. In an experience, rats would sometimes be rewarded when pushing a lever of food. He discovered that rats that were sometimes rewarded tended to try harder and longer than those who were either never rewarded or always rewarded. When a stock tanks 20%, and start recovering 10% in the span of a week, you feel that you may recoup losses if you stick with it and try harder (read, double-down). Yet, the following week, it goes down again. It is harder to quit when you win sometimes. If you had lost or gained 90%, you would have cut your losses or run with your profits sooner, similar to the rat experience. Instead, combined with a fear of missing out a recovery, you decide not to quit and end up with a bigger loss.

 

Resetting gets easier with time

Hopefully, you won’t have to press the reset button too many times. But if you do end up doing so, you will gain experience and will become a better judge at deciding when to quit and cut your losses. Personally, I like to turn the tables around by doing two things: seeing the positive stuff and taking a stress-free weekend.

 

So turning back our attention to the issues mentioned earlier, here is the positive stuff:

• This week’s (or even month’s) losses were bad and it is hard to start again. My account did not go bust. I simply lost the profits I had made for 2018. If I was able to do it once, chances that I can do it again.
• My currency holdings are well-hedged so far. I still think that we are heading to a no-deal Brexit. Even If I am wrong, the downside is limited in light of my allocation (40% in pounds, 45% in dollars and 15% in euros).
• This one is harder to figure out in the short term. Yet, I know that I’m doing a better job compared to 6 months ago. This means that, with experience, I get better in time.
• The one thing that is worse than a bad investment is regret. Failing to invest time in your family will become your greatest regret. There is no amount of money that will make those regrets go away.
• I just spent a fantastic weekend with the partner. What else could I ask for?

 

Pressing the reset button is your two-day break to refocus your mind and change tactics. There are times when you feel that nothing works, even on the investment front. Take a step back and as we like to say, stay calm. The worst thing you can do is to double-down in a panic.