The market is a beast that doesn’t care about you, or anyone or anything.
It doesn’t think, feel or hurt. It is a force of nature, from calm and placid to wild and crazy.
As the wind on the high seas, it is out of our control, indifferent to our desires, fears, hopes and needs.
Most investors try to get two things at once when investing: Good returns while keeping peace of mind.
However, anyone who has already invested knows that volatility —the inevitable and constant movement of market prices— produces great suffering over time. So much pain indeed that the average investor, seeking to avoid the psychological distress volatility puts over him, ends up spoiling their own investments, obtaining very poor long-term results (blue arrow in the chart below):
To reduce the pain produced by the inevitable volatility, three things can help:
- The first is to recognize that when we say “we want peace of mind”, what we really want is “peace from the mind”. So embracing and understanding the rationale and fundamentals of our investment strategy is a necessary condition to remain calm during the long road ahead.
- The second is to invest in a strategy that is not as volatile as to invest in pure assets. Hence the added value of the Austrian Strategy I propose, aiming for equity and gold-like returns, but with half their volatility. That is, similar returns with half the pain.
- The third way is to develop a stoic attitude:
Stoicism as the best attitude to face investing
Why volatility is so painful? (Quick reminder: the absence of a reasonable amount of volatility in any product or strategy is always a red flag).
The answer was first discovered by the Ancient Stoics more than two thousand years ago: We worry about everything, but especially about what is out of our control.
Ancient Stoics discovered first that it is useless to worry or stress about what we can not control, so we should focus only on what we can control. So, as in almost any other aspect of our lives, the “secret key” to invest successfully is to be aware of what we can and what we cannot control and act accordingly. This is not a popular “secret key”, but is the ugly truth. The sooner we accept it, the sooner we will be able to:
- Focus on what is in our control —such as reducing costs, taming our own behavior and choosing a valid strategy that best fits our character, personality and beliefs.
- Avoid being disturbed or distracted by what is not in our control —especially our own emotions, but also the short-term influence of noise in the form of market volatility (stop looking at the markets every 5′), flash news, rumors, etc.
It turns out that these two elements are the core of the Ancient School of Stoic Philosophy (you can read a brief historical introduction here, or a 5′ video introduction here), whose general principles —thousands of years old— are still useful when investing today.
The control of emotions
As Benjamin Graham said: all other things being equal, the most important factor in investing is ourselves. In the same way, the starting idea in Stoicism is the control of our emotions:
We can not choose our external conditions and what happens to us, but we can always choose how to react to them.
Control of impulses, knowing how to handle anger, frustration, impatience… We cannot control if our assets go up or down, but what we can do is to control our feelings about it. The central point of Stoicism is how to keep our mind cold by answering the following question:
Know what you can control and what you cannot
Why should I be nervous? (about the news, this market reaction, etc.) Ask yourself this question every time you feel stressed.
The Stoics taught us that if it doesn’t depend on you —it is beyond your control—, and you have already set the decisions to be taken in any scenario (that is, you are investing through a sensible strategy); your worry and emotional stress about it cannot add any help to the problem except inflicting yourself with unnecessary suffering.
Prioritize lasting satisfaction to immediate satisfaction
Another principle of Stoicism is to focus on what it compounds in the long term, instead of letting ourselves be carried away by what is fun now or pleasurable in the short term.
This is a hard battle, especially in our western culture of immediate satisfaction. We want everything and we want it now.
About delaying satisfaction, Stoicism can be placed at the opposite pole to Hedonism. Hedonism seeks to constantly maximize pleasure and satisfaction at any moment. But the Stoics considered that the immediate pleasures can only give happiness for a moment. Only the achievements obtained through consistency and effort will bring us everlasting benefits throughout our lives. Examples: healthy diet, fitness planning or a sound long-term investment strategy.
This brings us the underrated power of consistency and delaying gratification: Focus and consistency compound in the long term exponentially, meaning we usually underestimate the power of small changes over a long term, and overestimate big changes that do not persist. Do an easy (low-effort) small change every day and you will change drastically your life in a few years. For example: reduce 1% of carbs in your diet every day, increase just 2% of weight in your dead-lift every time you go to the gym, read 100 pages every night instead of go partying or watching TV, or invest every month without skipping any month (DCA) in a sensible strategy. It doesn’t seem like a big deal. But over the years they create a giant impact on your life.
The power of delaying satisfaction lies in the exponential explosion that comes with focus and discipline over time. The explosion will happen in the long term, but in order to happen, you have to focus every day, starting today.
We all want peace of mind. People usually retire to the countryside, to the beach or to the mountains looking for it. But it is a bit naive to think we will find the peace we lack in other places when we always take ourselves with us wherever we go.
Finding peace depends above all on ourselves (unless we are in the midst of war or other impossible conditions, of course), not where we are now. Nowhere can be more calm and quiet than in our inner soul. So instead of looking for new places seeking peace, think about giving yourself the opportunity to find your own eye of the hurricane. Constantly give yourself this restorative retreat, as it is in your power to do so.
All the misfortunes of man derive from the fact of not being able to sit quietly and alone in a room.
As I said at the beginning, emotional control is one of the most important ideas of Stoicism.
Seneca used to do a (hard) mental exercise in order to become more robust to his own (uncontrollable) emotions: He visualized losing his favorite horse, or his library burning (place here your favorite possessions), or his loved ones dying in the war and never to be seen again. The Stoics believed that it is healthy to remember that everything is sporadic and can change, that nothing is permanent or absolutely safe forever. Remembering this will allow us to be aware of how wonderful and miraculous simple and everyday things are.
Without reaching the extreme visualization proposed by Seneca, it is convenient to visualize, as realistically as possible, how we are going to feel if the strategy produces in a month -3% or -4% loss, or if it loses money consecutively for 4 or 5 months in a row.
Then ask yourself: Will I be able to remain calm and confident in the validity of the strategy, or will I become so nervous that I will abandon the strategy (not allowing it to converge to its average return rate)?
It is important to visualize oneself in those types of scenarios —perfectly normal and eventually occurring due to the natural volatility of the markets and the strategy. When those situations arrive, the emotional impact on you will be weaker, and you will be able to make reasonable and sensible decisions not conditioned by your emotions.
In conclusion, regardless of the chosen investment strategy, having a stoic attitude will help when confronting the unpredictable markets, preventing us from becoming our own worst enemy.