I’ve been think a lot about this recently, and without wanting to go down the rabbit hole of investor liquidity (the mismatches that have grown over the last 20 years between investors demands and investment managers strategies), wanted to explore the concept.
I have had the pleasure of meeting and working with some of the smartest analysts and portfolio managers from around the world over the two decades, and while their strategies and approaches varied wildly, they had a few common traits.
The largest of which was, ability to manage their emotions or confidence.
In pro-investing; on the 1st of January every year, something remarkable happens. Whatever you had achieved over the last 12 months is wiped away. Gone. You are reset to zero (or in hedge funds cases, below zero as your high water mark for the year meant you need to perform to get back to flat…anyway Idigress).
At that moment the +30% and the down 5% girls and guys, all go back to zero. In that moment something strange also happens, people became (overnight almost) more conservative. Why?
Well, at its core is the psychology of investing. Its that very same sense you have at the race course, or casino, or even at the start of a sports game. The act of picking a winner(scoring a goal/try..), means you are in profit — if not in reality, in your mind. You have a ‘buffer’, an amount of money (or P&L) that you can lose without going negative. It shouldn’t matter, but it does.
Suddenly you are able to make incrementally better decisions, or perhaps not better, but to release the risk restrictions (tight shoulders) you had before then. If you think about this in the context of your own investments (or gambling) you will know it to be true. It is confidence.
Mastering your own mentality is one of the most important steps in investing. Creating that sense of freedom to invest, without fear of loss.
Part of this process is establishing rules for handling loss, and part of it is a process for building ideas and positions. Trading your P&L is a very powerful insight into the psyche of an investor. How do you act when things are going well? How do you act when they are not? How many of your actions, when losing, compound that problem?
The answer is different for everyone, but starts with process and habit = rules. These rules encourage confidence. Confidence in the process, but also confidence to evaluate, refine and iterate.