Journal of Emotions - #2 Feeling validated by price changes
and why we shouldn't talk about our investments
2022.Q1 - February until April
The first quarter of 2022 presented several opportunities for me. I made several moves at 10x free cash flow where all future growth appeared to be excluded from the current market valuation. I felt good about the investments, because I had 13F backup on all of them, purchased at lower prices than they did and felt like my margin of safety in the companies was relatively strong.
Today I want to talk about my feelings of validation and how they can be quite dangerous. When looking at the price ranges of my investments in 2022.Q1 I literally happened to purchase some companies at their low points. I know this was simply luck and they could go lower. But they didn’t, the price movements shifted, and I started seeing some gains. This created a self-reinforcing feeling of pride in my decision-making.
At first, I felt that my approach was validated, because I did what I learned to do. Buy great companies at prices below intrinsic value. No problems so far because I still believe I did. Then prices started to increase, quickly bringing market caps in the range of 12x to 15x free cash flow yields. This made me feel validated again. At its strongest this feeling made me want to call my mother (I manage my family’s investments and no this is not a joke) and tell her that value investing truly works. RED FLAG ALERT.
Quick spoiler, I did not call my mother and I did not talk about the investments or about how great my decisions were. I held off, because I realized I am about to fall into a trap of my own making. Now fast forward from Q1 into Q2 and thank God I kept my wits about me, because now prices are coming down again and guess what? I feel validated again!? Emotions truly are the enemy of the investor, and I am so grateful for the experience.
Feeling validated by an event means that the external event, which was not under my control made me feel as though I made good decisions. I believe that in this case (buying into the decline at 10x free cash flow and less) this is true. But if that is true, how can I feel validated again when the opposite event occurs (prices going up)? And then how can I feel validated AGAIN when prices are falling again? The answer is simple, you can feel anything because of anything. But most of the time my feelings will try to fool me into thinking positively about myself. This is of course the essence of what Charlies Human Misjudgment is all about. I am blessed that I have read his speech many times, have studied it, read up on it and added it directly into my investment checklist. Now I am thinking that it is worth it to make a checklist as a flow chart on what to do when certain emotions are being felt. If I do that, I will share it.
Now if I had called my mom (or other investors) and would have openly stated that I made good decisions I would have broken the cardinal rule of not talking about your investments. If I had done it, I would have created the most dangerous part of the self-reenforcing loop: saying it out loud, but pounding it back in. I experienced commitment bias, overconfidence tendency and inconsistency avoidance and had I acted on them I may have created possible psychological denial about what part of everything was truly in my control and what was not.
Let this be a lesson to myself, and hopefully to others reading this: We will feel what we will feel. We cannot control what feelings will come when, they simply do and trying to control them is being in denial about our human nature. Let the feelings be there, let them do their thing, let them be strong and let them be demanding; we cannot control them. But do not act on them. Sit them out, be on the sidelines. I meditate and write them into my Journal of Emotions, which then turns into posts such as this one. Writing them down as they occur, openly acknowledging what I feel and what I want to do because of them is a great way to not act but fool myself into feeling like I did.
One quick side note to add that I think is critically important when writing a journal such as this one is the way I phrase it. Always include statements that reinforce those feelings are important, that they are ok, but they are triggered by events, and we cannot control them, that they do not define us. Always write down that while the feelings are totally ok, it is highly probable that acting on them is wrong. This allows me to be human and share my feelings, while at the same time place them back into the greater context of the possibility that I am wrong.