- Dopamine highs and lows affect you more strongly when real money is on the line.
- Your biases mess with your head, and mess with your ability to even see a bias as a bias.
- Cut losers, not winners. This one will mess with your mind.
My first week of investing has been an emotional roller coaster. While I am on average a gregarious guy, I am not prone to extremes of passion.
Since I’ve begun investing with real money, I’ve had a first hand experience with the highs and lows, and with how chemicals like Dopamine(see here) can really mess with you. When you’re up, you can’t help but be cocky and self-assured. When you’re down, your shoulders slump, and you just don’t want to talk about it.
How my trading journey started
After my first buy in, all of my stocks were in the read, I was down a good $70 in fees and losses in price. My $BPT pick went from 20.50 to 20.05 or so faster than you could say “value trap.” At the same time, a new article came out by a clever short seller who was looking to stir up a panic against $BPT. He hadn’t come out with any specifics about the Trust I didn’t know, except a few not-so-obvious gotcha type interpretations that sent me on a reading frenzy to double check. Of course, he was projecting an absolutely worst case scenario that had a wait time of about 2 years.
In those first few moments of course, my heart dropped. Was there something I’d missed. I was down already, seeing so much red, and here was this guy telling me I’d been a complete fool to have ever bought such a shoddy security.
A bad pick goes badder
Around that time, another pick of mine, $CHK had drifted down, and another new article came out which I’ve talked about before. Finally there was a completely idiotic pick I’d made, $SBGL which was starting to fall like a stone.
On the $SBGL front, what had happened was the very day I had bought the stock when things looked acceptable for a long term investment, the wise managers from South Africa had decided they would forgo a dividend this time, in order to pay down the debt they had accumulated from their Stillwater acquisition (as well as a lawsuit payout). I missed this news, it got buried, and I didn’t find it until I noticed $SBGL had fallen %9 and I started going back over the fundamentals of the company to see if I had made a huge mistake, or this was just par for the course. Then it was down %10, then %11 percent around the time I’d found the news about the dividend cut.
My first instinct was to stay in, to at least hope to break even. But I knew that could just be my mind’s biases playing tricks on me. I started to enumerate why I was in my $SBGL position. I had thought it was a discount buy, and it still was, but I had also liked it because it was Gold/Palladium, and I know I have a bias towards Gold that I should be keeping under control. I had also bought it because it offered a dividend, and I added a bit of value to the stock as I considered this a good sign that management was committed to offering incentives to shareholders. But now that they’d cut the dividend out of the picture, I wasn’t so sure I liked the rocky road ahead.
At this point my other picks were doing well. I’d also taken a position in $HP, Helmerich & Payne, one of my earliest picks based on an evaluation of their business, but also the recent Hurricane Harvey, which I knew would cause a stoppage in oil production, minor damage to some rigs and so on. I figured $HP would be a solid bet, and that turned out to be correct in spades.
I dug into $HP a bit more, I wanted to revalidate my impression of the fundamentals. Since buying they had given a presentation on their business which had alot of optimistic data to chew on. $HP was looking even better, and if Oil Prices went up, things would only improve. My macro-view at the time was bullish on crude, so I had a simple choice to make. Cut my losses in $SBGL and apply that cash to my other positions, specifically $HP which wasn’t nearly as big as I wanted it to be.
The turmoil that wracked me. I wasn’t sure what to do. Was this the time to wait it out? Was I violating the rules of Value Investing?
Going medieval on a loser stock
Then I remembered the golden rule of poker. Always look for a reason to fold. Sir John Templeton, a personal hero of mine, was supposedly a great poker player, and I am rather fond of the game myself. My $SBGL hand was rags to begin with, and the flop had produced nothing – it was time to fold.
Instantaneously my anxiety went away, I was merciless. I dropped my $SBGL position and piled money onto my $HP position. Within a day I had recouped all of my $SBGL loses, including the extra fee for trading out, and was suddenly in the green.
It didn’t hurt that my $CHK position was positive and just at breaking even after fees. My $BPT position was also on the rise, and my faith had been restored in it.
I’d also taken a position in $VVUS, a pharma company that was trading so low it was only a few $100 for a good little speculative position. Good news had just arrived for $VVUS as well and it was showing a profit.
As much as I hated being in the red, being unsure, I loved being in the green 10 times more. Hah, I’m so fucking smart. Hell, this is so easy. I must be some kind of a genius.
Fooled by randomness
It was an hour or two before I started to really notice the change in my behavior. Why did I all of the sudden feel like I was godlike in my ability to call the market. I didn’t make it go up, it could have just as easily gone down. While it may have been a good decision at the time to cut $SBGL, maybe tomorrow it’ll shoot up 20% and I’ll hate myself again.
I have precisely 0 evidence to suggest that my current situation was due to me being smart, and every bit of evidence to suggest that I had just lucked out (possibly, time will tell) by entering the market at a “good time.” for Oil prices to be trending upwards.
I had been, in a sense, fooled by randomness, or at least fooled by dopamine. In the abstract I’m glad that my dopamine hit came after cutting a loss, because that might serve at least to reinforce decisive loss cutting behavior.
When you feel bad, all you notice is how bad you feel. You focus on your environment, the mistakes you may have made. When I felt low, I was hitting the web, looking for missed news, looking for additional financial data, going back over the balance sheets and cash flow statements.
But when I felt great, when I felt like I was the smartest person in the world, I had zero inclination to verify it. With that realization, I had to force myself to go back and look over balance sheets, to check my best performers, to really think about my positions.
The devil you know, the devil you don’t
About an hour ago, for the first time my account made money. I was up 1.64%. Then one of those biases came creeping up: “Wow, you dodged a bullet there. Maybe you should cut your losses. You made some money, you proved you could do it. Might want to quit now, while you’re ahead.”
Just 30 hours ago I was battling with the opposite demon, the one that tries to convince you to wait it out, to try to break even. The one that doesn’t want you to cut your losses. Now I had his fraternal twin on my other shoulder, whispering poison in my ear, trying to convince me to cut my winners too early.
The past 14 days of trading has been a constant battle. A constant battle with myself. A battle to do research, to read, and to think about things before buying them. A battle against fear and insecurity, against crippling doubts and second guesses. Pulling the trigger on some of my larger positions was no mean feat. I knew I wanted to buy $BPT at 19.6x or so. But I still waited until it had risen to $20.50 before I forced myself to pull the trigger. My first buy into $HP was hard as well, luckily when I was going over the stock it didn’t move around too much, but it was my most expensive stock per share.
I’ve never in my life spent so much money in such a short period of time. The fruits of my labors, a significant chunk of my savings. Maybe it will turn out to be the worst mistake I’ve ever made. But in the previous 14 days – I’ve learned a lot.
I’ve learned that what the really experienced traders warn you about, about how you’re the enemy, you’re the biggest problem, is all true. I’ve learned that all of these easy money yahoos probably don’t even trade. They barely even discuss this internal battle, they don’t talk about the biases and angels and demons that pop up on your shoulder throughout the day. They don’t talk about how addictive trading and investing can be. About how, no matter what you’ve read or heard, you’re never prepared for when that dopamine high hits you. You’re not prepared for those crippling doubts and uncertainties.
How every uptick makes you feel like a boss, and every downtick makes your heart fall into your stomach.