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Ego, Self-Doubt, Survival

I made a bad trade this week, which has led me to reflect on risk taking in general. The interesting thing with managing money is that unlike in other spheres of life— parenting, many forms of work, spirituality—you can keep score and track the quality of your thinking. In the sixteen years I’ve been tracking my investment results, $1 grew to around $3 averaging around 8% per year with low volatility. While more has gone right than wrong, I remember the trades that are wrong more acutely than the ones that were right. I think this is wiring, at least for most people. I don’t recall most of the time I’ve spent behind the wheel of a car, but the few times I’ve been in car crashes I recall quite vividly.

To navigate not only investing but life, requires a precarious balance between ego and self-doubt. “Living in the present” always struck me as empty. To survive, it is critical to think ahead. To form a view of the future requires not only conceptual ability but raw ego, the belief you are capable of forming a view. At the same time, you need to marble this view with self-doubt because who can be overly sure of anything? Finding the balance between ego and self-doubt is quite challenging, at least for me.

When I reflect on my own risk taking, the easier part has been forming a view. The harder part has been managing the associated emotion around executing that view. When you invest correctly, you make money and wonder why you didn’t take more risk. When you lose, it’s normal to think you might be a dunce. So there is always a degree of pain. My results indicate I should have taken much more risk, something I’m trying to learn to do at the tender age of 54. But my wiring is such that I am always well aware of what can go wrong.

Outliers I suspect are wired differently. For instance, Alex Honnold, the guy who climbed El Capitan without a rope, seems to be missing the part of his brain responsible for fear. I’ve climbed up the side of Half Dome in Yosemite and looked down over the lip. Pretty unnerving. Boris Berezovsky, a now dead (murdered?) Russian oligarch I spoke with a number of times flew in a plane from Chechnya that was possibly wired to explode. He calmly read the newspaper while panicked guards ripped the interior apart. Elon Musk runs three companies (SpaceX, Solar City and Tesla) at once and tolerates people dying in car crashes, rockets exploding and has had three wives and ten children. Perhaps he has a bit of Honnold in him, too.

We need ego to accomplish difficult things. Ego helps us to bounce back from crushing set-backs we encounter along the way. On the other hand, self-doubt is critical. People do die rock climbing, Chechens have blown up bombs to hurt civilians and people with too much mental stress do have breakdowns. I suppose we all fall on a spectrum and the ambiguity is how to navigate the ego-self-doubt range well. As the sage Kenny Rogers said, “you got to know when to hold ‘em, know when to fold em, know when to walk away and know when to run.” Easier said.

Polls

Last week, 96% of readers thought the stock market would fall another 10% to 30%. This week the S&P rose 2.5%. Readers also asked for a broader array of topics and better analytics. Point taken. Relative to the discussion above, I’m curious in your answer to the below.

Painful Learning Experiences

I’ve had lots of painful learning experiences, some of which I described in Raising a Thief. Regarding the money management equivalent of a car crash, I’ll share a few and am curious for yours. The big point: there is a huge distribution of outcomes; when you get caught in a tail, trader talk for a rare outcome, man it hurts. But getting caught in a tail needs to be part of your expectation, this happens to everyone and the more risks you take, the more you will need to deal with such things.

  1. Buying Stamps.com – “Everyone loaded up on stamps.com,” said the salesman. I was a strategist at a Boston bank in the 1998-2004 period, around the api-center of the first tech bubble. The salesman served tech clients and stamps.com was one among many of such companies. Like a dope, I bought a little, not having any clear idea at the time how to even assess if a stock was cheap or expensive. Below is the stock. It fell about 90% not long after I bought it and remained depressed for….15 years. Then finally the concept took off and it eventually was acquired, but my money could have been much better invested elsewhere. The point: never invest in something you are unfamiliar with unless you build your framework, from the bottom up, about how it works.

     

  2. Futures brokers – A number of readers asked me about “implementation.” These essays are not investment advice. Investing is risky. That said, one of the instruments I use are called “futures,” financial contracts that originated when farmers sought to hedge the risk of crop prices by “selling forward” their crop at a guaranteed price. This same instrument now allows you to get exposure to just about anything with one advantage being that if you desire to profit from price declines (which his extremely risky) you can. I have used numerous futures brokers before arriving at my current one and two of them made me so nervous that I yanked my money not long before each collapsed. One was called Refco.1 In Refco’s case, I could see the security on their web product was so bad I took a wild guess that the whole company was rotten and pulled my dough. The point: sometimes it isn’t the trade that kills you, it is the intermediary and implementation. Have you ever wondered if your insurance company will be solvent? Take a look.
  3. Real estate Vietnam – For years, I traded only what are known as liquid assets, things like stocks and bonds are easily sold. I’d run into people who were evangelical about illiquid assets, that is, assets that are difficult to sell, chief among them real estate. Conceptually, owning a property and renting it out is like owning a bond—the rent is the coupon and the property itself is the principle. What I wasn’t told is what real estate Vietnam is like. Real estate Vietnam is the sudden, completely unexpected problem with the property, like the time a 100 year-old pipe ruptured two floors up in a property I own. All of a sudden I went from sitting on a bond collecting a check to having a contractor perform by-pass surgery, while the young couple with the infant that lived there suffered. The point: every investment, has “hair” on it, something difficult and unexpected that cause pain. I was dealing with a discrete real estate issue, the big risk is that you own in a place like Detroit, which is the far end of the “tail,” below.

     


Case study: heat

Where I am now, Connecticut, was awfully hot this week, alternating with heavy downpours. Where I am going—former Yugoslavia—is going to be just as hot or hotter. Global warming is immensely complicated and my research, developing a framework as per the above, is still beginning. Every time I look at charts and illustrations of how all the variables work, I find the topic quite complex. Some of you may know more about this than me. That said, a few preliminary implications of global warming that I am tracking and that influence how I invest.

  1. Food supply. In previous posts, I’ve shared maps of US drought. Food production and consumption is global (as we know post Ukraine) but the specific conditions are illustrative of what is going on around the world. A study published last year in Nature, argued that corn and wheat yields could decline by about 20% in the next 8 years. The US spends $9 billion a year on payments to farmers who suffer losses either due to drought or prices and these payments are growing.2 High and unstable food prices are a worry for the rich world but can trigger massive social instability in the poor world. To what degree are civil wars in places like Syria related to food shortages going to spread? How much will this impact inflation?


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