How do you control emotion when your stock goes down

[fuluvu]

How do you control your emotion when the price of one your top holding stock or the market value of your portfolio drop?

 

Mr. Buffett always values temperament and one’s ability to control emotions for investment success more than intelligent or knowledge.

 

“The most important quality for an investor is temperament, not intellect. You don’t need tons of IQ in this business. You don’t have to be able to play three-dimensional bridge. You need a temperament that derives great pleasure neither from being with the crowd nor against the crowd. You know you’re right, not because of the position of others but because your facts and your reasoning are right.”

 

“I am rational. Plenty of people have higher IQs and plenty of people work more hours, but I am rational about things. You have to be able to control yourself; you can’t let your emotions get in the way of your mind.”

 

As value investors, we always understand the price volatility is not risk, the permanent lose of capital is. However, no matter how well I understand and remember these concepts, I still experience emotional swings when one of my top holding or the market drops significantly. During this situation, my subconscious may take over and initiate the automatic response.

The brain of different person may wire differently. The brains of great value investors, such as Mr. Buffett, Munger, Klarman etc may be wired in such a way that they experience little emotional anguish when their stock or portfolio goes down.  But, I believe most people experience emotional swing when their stocks price goes down a lot or up a lot.

 

How can one train one’s mind to respond differently? If this is a personality trait that cannot change, great value investors benefit by their genetics.

 

If one cannot control his emotion, he may make wrong buy/sell decisions and mastery of investment knowledge or IQ does not help.

 

[thepupil]

Are you sizing things "above the sleeping point"? Maybe re-evaluate your single position / overall risk tolerance?

 

In general, the emotion I fight is "I am right, the market is wrong, I should buy more" (otherwise known as arrogance) when stocks are going down and the old "no one ever went broke taking a profit" when stocks are going up. Both are dangerous.

 

For me the best cure is to have a range of intrinsic values for a security and to avoid binary/truly dramatic  buy/sell decisions.

 

Also for my biggest positions I sometimes buy a put as "being wrong insurance". In general (in this market at least), I've been more right than wrong and having fixed downside has allowed me to stay the course, add to short term losers without jeopardizing the whole nut, and therefore made me more money than lost in premium, but I don't know if it's a good long term solution (because it costs a lot). Nevertheless, sometimes it helps to know "this is a 20% position, but if in 1.5 years I'm totally wrong, I'll lose 450 bps, which is manageable and recoverable with savings/earnings/career progression".

 

Not sure if that's at all useful.

[Rod]

We all have emotional responses and biases to deal with including Mr. Buffett. Some people are better at holding them at bay and not letting them interfere with rational decision making. I'm sure it's a learned skill to some degree. One thing that helps is to understand the biases and emotional reactions that you are prone to and create rules of behaviour that directly counter them that you commit to obeying at all times. For example, if you are dealing with losing positions, you could have a rule that you never average down. You set the position size when you first buy the stock and never add to it. That will directly fight against the impulse to try to lower your average cost by buying more, which is a form of denial. You could also have the rule that when a position is down you imagine that you don't own the stock and ask yourself if you would still buy it. That rule helps you deal with the sunk cost fallacy that we are all prone too. You have to be brutally honest with yourself. Some people (most?) probably cannot succeed at this. They should not be investing directly in the stock market except through indexes in the most hands off way possible.

[LR1400]

Use a stop loss

 

[EricSchleien]

Controlling your emotions is an absurd concept. The more you try to control them, the more you're actually stuck to them and the more you'll keep them around. This is basic ontology & neuroscience, in a nutshell, depending on the lens you look at it from. I can tell you the vast majority of people talking about the need to control emotions are operating from some belief system about it and haven't actually gone through any kind of transformational experience where they truly got free of their emotions (which btw makes you feel them deep and a greater ability to express yourself authentically from that space). It's really more like the question: do you have emotions or do your emotions have you?

 

If someone doesn't get this and I'm working with someone directly or in a group I MAY say something like (and this would be a 10-20 hour conversation) so this won't really cut it just writing about it and it being some intellectual exercise on here... but would be something like....

 

[1] Notice that you are opinionating.

[2] Notice that you have an opinion of your opinionating.

[3] Notice that you try to control your opinionating.

[4] Notice that your opinions don’t care, and keep flowing anyway.

[5] Notice that you are not running the show, your opinions are.

[6] Notice that you are not your opinions, rather, you have opinions.

[7] Or, Notice that your opinions have you.

[8] Notice that this is going on 24/7 in the background.

[9] Do not attempt to correct or fix the condition – simply Notice.

 

Without authentically being in this space as the DEFAULT space, all the other stuff to "work on" yourself will be ON TOP of the lack of consciousness around all the emotional stuff and just devolve into another tactic or inauthentic technique and not make much difference long-term.

 

This describes the phenomenon of people who spend their whole life trying to "get better" with social interactions with people, confidence, etc and then 20 years later they still feel something lacking but have LEARNED all these MENTAL MODELS and can intellectually talk about all the different ways of thinking but then use all of that to hide behind some insecurity or some experience of something lacking. And it's a lot of work.

 

So you can take the route of learning how to CONTROL your emotions better....and I promise you in 20 years.....you still will NOT have mastered it but now you'll have just learned new ways to use control around your emotions and it will just be some more, better, different version of the 20 years prior except this time with WAYYYY more energy and WAYYYY more MENTAL MODELS and CONCEPTS around emotional control.

 

Or just be free of it and no force or much energy needed and you can spend cognitive energy on actual expression VS some kind of survival thing around emotional state which will get VERY exhausting over time.

[tombgrt]

I'd recommend reading 'What I learned losing a million dollars'. Gave me lots of great insights.

 

I've also certainly learned from experience. Losing a few thousand dollars used to make me feel weak in the knees, now I know it is temporary. Lost 20% of portfolio value last week as energy sold off hard after far better returns earlier this year. Not exactly pocket money but you go nuts if you compare it to real life spending and income. Gets better with experience as I said. Certainly a rollercoaster of emotions but a ride I try to just accept and not suppress. You are not your emotions as Og states. Realize extreme emotions are very likely way overblown and do not reflect reality. If possible, act on them by selling when euphoric and buying when feeling despaired.

[KJP]

The only thing that works for me is writing down in advance why I'm investing in the company and the objective metrics I will use to monitor the company's performance going forward. 

[mwtorock]

i try to check why the price goes down and whether that would change the thesis to invest in the business. that reevaluation process adds time gap between the price drop and the decision to sell, so it tends to help in my case to get rational or less emotional decisions.

 

 

[writser]

On a painful day physical exercise helps. Or do something fun with friends / family, or read a good book to take your mind somewhere else. Talking with other investors about your positions is a good way to regain some confidence and/or find flaws in your reasoning.

 

Also, as others pointed out, you should write down your theses beforehand. Why did you buy a stock, how did you decide position size, what do you perceive as risks, what is your estimate of fair value, how confident are you in this idea, what are key indicators that your thesis is right or wrong? Put your thoughts in spreadsheets, documents, your diary, whatever suits you. Several investors I know have a blog where they share their ideas (an alternative is this forum). I've been too lazy for that but sharing your thoughts publicly is probably an even better idea because people will call you out if you share sloppy, half-researched work. By writing stuff down you 1) force yourself to clarify your thoughts 2) make it harder for yourself to fall for 'thesis drift' and 3) you can read back your own thoughts to get a bit more confidence if the shit hits the fan. Also, if you write something down consistently before making a big decision you effectively force yourself to have a 'time-out' before doing something potentially stupid in the heat of the moment.

 

I agree with thepupil that if you lose sleep or get super anxious then maybe you should re-evaluate your portfolio buildup. There hasn't been a serious crisis for about a decade - if you have experienced severe distress the past few years then maybe your portfolio is too concentrated or too large.

 

Finally, to invert: what you should NOT do is sit brooding alone behind your desk, listening to Jim Cramer shouting on CNBC while reading FinTwit on your phone, drinking a few beers to release the stress with your trading interface open with the daily P&L in big red numbers in the center of the screen, trying to remember why you ever bought a stock in the first place.

[Foreign Tuffett]

Proper position sizing and portfolio construction can really help. Never take more risk that you can afford, either financially or psychologically. Unfortunately, many people deceive themselves about their true risk tolerance. Know thyself.

 

I would echo writser that watching the tickers flash green and red as they tick up and down is deleterious on multiple levels. One reason that day trading doesn't work is that this type of behavior grinds people's psyches down over time.

 

Last but not lease, watching other people get rich is mentally painful. It's best to stay away from the noise on Twitter, CNBC, etc. Stick to your strategy and don't worry about what everyone else is doing.

 

 

 

[Viking]

When i buy a stock and it then falls in price (lets say 5-10%) i then learn something from my emotional response. If i want to buy more (i am feeling greedy), it tells me i likely understand the investment. If i want to sell (i am panicking), it tells me i likely do not understand the investment. I use my emotional reaction to price declines as feedback to help me with how well i understand my investments.

[Gilp]

When i buy a stock and it then falls in price (lets say 5-10%) i then learn something from my emotional response. If i want to buy more (i am feeling greedy), it tells me i likely understand the investment. If i want to sell (i am panicking), it tells me i likely do not understand the investment. I use my emotional reaction to price declines as feedback to help me with how well i understand my investments.

 

Great insight Vik.

 

I think it's mostly about how well you understand the business and the situation. If you understand well, you buy more on the dip, if you don't, then it's one of the best incentives to go back and do more of your homework.

[DooDiligence]

When i buy a stock and it then falls in price (lets say 5-10%) i then learn something from my emotional response. If i want to buy more (i am feeling greedy), it tells me i likely understand the investment. If i want to sell (i am panicking), it tells me i likely do not understand the investment. I use my emotional reaction to price declines as feedback to help me with how well i understand my investments.

 

Yep.

[nickenumbers]

Great question, conversation and shared information.

 

I am learning about investing and about myself along the journey also like you all.  I make mistakes, and that is the tuition of wisdom.

 

In the last 2-3 years I starting journaling my trade thesis.  What I bought, why I bought it, what my margin of safety is (qualitative or quantitative), and when I will sell it (Based on passage of time, or a certain full value number.)  Someone else used the term, Thesis-Drift.  HELL YEAH!  I can lie to myself in 30 days and convince myself of just about anything if I don't write it down to remind myself.  [see Charlie Munger for examples of human misjudgement and bad psychology.]

 

I also have a small checklist that I try to force myself to walk thru before the trade.  This forces me to stop saying, "I know this, and I think that..."  AND, it forces me to say "HOW do I know this, and WHAT makes me think that, and IS this in my circle of competence?"

 

And finally, listen the the master-  "If it's close, we don't play." -- Ben Graham  You have to walk away from a lot of the rocks that you turn over.  Only the best of the best deserve your time and capital.

[TwoCitiesCapital]

Proper position sizing and portfolio construction can really help. Never take more risk that you can afford, either financially or psychologically. Unfortunately, many people deceive themselves about their true risk tolerance. Know thyself.

 

I would echo writser that watching the tickers flash green and red as they tick up and down is deleterious on multiple levels. One reason that day trading doesn't work is that this type of behavior grinds people's psyches down over time.

 

Last but not lease, watching other people get rich is mentally painful. It's best to stay away from the noise on Twitter, CNBC, etc. Stick to your strategy and don't worry about what everyone else is doing.

 

This.

 

Being more active on selling positions when they've got a quick pop/re-rating has also given me more flexibility and willingness to commit on the downside.  Knowing that I have taken the gains off the table and have locked in a profit gives me the confidence and the capital to buy when things turn.

 

Back in January I had sold about 10-15% of my position in Sberbank at prices between $18-20 to take gains on what had become a very large position (cost basis ~$5). That money was redeployed back into the Sberbank a few months later at prices between $11-13.

 

Same with Limited Brands - I bought around $40 back in mid-2017 and sold a large chunk of it around $55 late last year and have redeployed those proceeds back into the name at prices around $30-35.

 

Have been doing similar trades with Fiat Chrysler every time it rallies/slumps.

 

I'm not catching the bottoms or the tops in all of these trades, but certainly improving the odds over a buy/hold. Since I'm using prior gains in the same name, it almost feels like "house" money - I profited from having sold and missed out on the fall. The psychology works the same even when redeploying into a different position that's fallen.

 

"If you buy the dip, you have to sell the rally" - otherwise you're simply increasing your commitment to the name monetarily and emotionally.

 

 

[Spekulatius]

I buy in chunks ( usually thirds) and fully expect to average down - it’s part of the process. I don’t size positions very large either ( rarely go above 10%), so a decline isn’t that big of a deal. I understand this is different from what many are doing, but it certainly limits emotional response.

[rkbabang]

Controlling my emotions when my stocks go down has never been my problem.  If I still think that I was correct about it, I buy more.  My problem is controlling my emotions when my stocks go up.  I tend to sell way too early every time.

 

[nickenumbers]

Controlling my emotions when my stocks go down has never been my problem.  If I still think that I was correct about it, I buy more.  My problem is controlling my emotions when my stocks go up.  I tend to sell way too early every time.

 

Hell YES!!  Letting your winners run is crazy important and easier said than done.

 

WEB and CM said at a shareholders meeting-  "We don't get paid for Activity, we get paid for being RIGHT in the investments we make."  Emotion makes you want to take action to fix, change, correct, etc..  it is the monkey mind at work pushing you to act...  But much of value investing is doing absolutely nothing.... until you have the advantage and you are RIGHT! 

 

Some great COBF member has the signature "A Portfolio of Inactivity boarding on lathergy."  Amen!

[Guest longinvestor]

If we drill a bit deeper into "your stock goes down" and ask, relative to what?

A) Your cost basis or

B) the recent 1-month, 52-week price levels?

 

Being concentrated in a long term compounder, BRK, the only emotion that comes into play for me is B). As others have posted, I've been lucky and greedy withe pull backs like in 2009, 16 and 18. The longer I've held, this emotion fades away. For folks who have held it for 20 or 30 years, there is likely no emotion at all with price wiggles. Sell when you need the cash.

[Rod]

I don't think you can "control" your emotions--you can only take note of them. I've learned to think of myself as having two internal advisors, one is Emotion the other is Reason. Emotion is loud and insistent and you feel what it wants in your body. You never need to stop and ask yourself "what does Emotion want me to do?". Reason can be much quieter and tends to get drowned out by Emotion. I like to stop and say to myself "Ok. I know what Emotion wants, now what about Reason?" In the case of a losing position, Emotion may say "HOLD" and Reason may say "SELL". From there it comes down to choosing which path to follow knowing that if I choose Reason, Emotion will scream at me not to do it! I guess this is where temperment comes in. Can you follow Reason while Emotion is screaming at you not to? It's especially hard because Emotion has access to your body and gut in a way that Reason does not.

[fuluvu]

Proper position sizing and portfolio construction can really help. Never take more risk that you can afford, either financially or psychologically. Unfortunately, many people deceive themselves about their true risk tolerance. Know thyself.

 

I would echo writser that watching the tickers flash green and red as they tick up and down is deleterious on multiple levels. One reason that day trading doesn't work is that this type of behavior grinds people's psyches down over time.

 

Last but not lease, watching other people get rich is mentally painful. It's best to stay away from the noise on Twitter, CNBC, etc. Stick to your strategy and don't worry about what everyone else is doing.

 

You have very good points. Watching stock tickers every minutes, hours or everyday is detrimental to one's health, physical or financial. There is average the same up and down days every year. Because of human psychology, people's unhappiness from losing money is double the happiness from making the same amount of money. Similarly, people's unhappiness from his portfolio down days is about double the happiness from his portfolio up days. Thus, on average, you are unhappy everyday if you watch stock tickers or your portfolio everyday.

 

Check your portfolio or stock price weekly or monthly might be a good idea. It not only makes your much happier, but also saves your a lot of emotional energy so that you can focus on fundamental research or other creative activities.

[fuluvu]

I don't think you can "control" your emotions--you can only take note of them. I've learned to think of myself as having two internal advisors, one is Emotion the other is Reason. Emotion is loud and insistent and you feel what it wants in your body. You never need to stop and ask yourself "what does Emotion want me to do?". Reason can be much quieter and tends to get drowned out by Emotion. I like to stop and say to myself "Ok. I know what Emotion wants, now what about Reason?" In the case of a losing position, Emotion may say "HOLD" and Reason may say "SELL". From there it comes down to choosing which path to follow knowing that if I choose Reason, Emotion will scream at me not to do it! I guess this is where temperment comes in. Can you follow Reason while Emotion is screaming at you not to? It's especially hard because Emotion has access to your body and gut in a way that Reason does not.

 

Very good insights regarding Emotion and Reason.

[LC]

I'll echo what people have already said - writing.

 

Writing works because it crystallizes your thinking. Inside your head you can feel any which way about something. Writing it down and reading it will show whether what's going on in your head makes sense or not.

 

Try to be smart on both sides when looking at Mr. Market: if it goes down and you want to buy more, it could go down further (so buy just a bit more). If it goes up and you want to sell, it could go up even more (so sell just a bit).

[bargainman]

The main emotion that you are attempting to control is fear possibly anxiety. As such I would encourage you to study the amygdala prefrontal cortex. Here is a quick article with suggestions to get you started

 

https://qz.com/450517/us-navy-seals-conquer-fear-using-four-simple-steps/

[Shooter MacGavin]

One way I've found to deal with it is to project your returns over an appropriate time period, and then build in mentally or on a spreadsheet an "allowance for equity loss" similar to the way a bank or insurance company does it...so if you're targeting 20-25% returns, maybe 7-8% is a reasonably conservative allowance annually that you can put aside in a reserve....so therefore you're really expecting to earn 13-17% annually.  If you're doing better than that, just assume you'll do a bit worse over time.

 

It's also fairly easy to test how your portfolio would perform over time given a few large loss scenarios..and then just know that you have enough of a buffer to withstand even a few zeros over time.

 

I guess this is a complex way of saying bake it into your expectations and know why you'll still be ok.