The Behavior of Change

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Pulling the trigger is the hardest thing we do

I’ve been talking to two family members for over a year about making investments in the stock market. In that time the market has returned over 20%. But neither one of them have benefited from the market’s performance, because neither one of them have pulled the trigger and invested.

Each of them has their reasons and excuses. One of them was waiting for the presidential administration to change. He had no faith in the outgoing administration, and is all in on the new one. The other one wanted something where he could make a HUGE return. The 8% average return the market yields wasn’t enough. So neither one of them has gotten involved, and neither one of them has grown their money as a result.

I should say, to be fair, that they each have their money invested, its just that their in products that they either don’t want to be in, or that aren’t getting them the returns they want. Which is the reason they’ve been asking my opinion on the market.

I think there are a number of reasons why we hesitate to pull the trigger on something we intuitively want. I think part of the hesitation is the illusion or distraction created by having too many “choices” (if you listen to Wendell Berry he says its the illusion of choice that is our biggest hindrance in life). Why should I invest there when I could invest here, or in that new thing everyone is talking about? What’s that thing everyone is getting rich off of? I think part of it is fear of the unknown. Of doing something you’ve never done before. Something you have little experience with. What if the market goes down? What will I do? And I think part of it is FOMO (fear of missing out). FOMO of bigger returns, better investments, doing something else with my money!

Whatever the reason the result is always the same. Inaction caused by indecision. Inaction that causes missing out on material gains, and mental distress left by the weight of your indecision.

Two years ago when Jen (my fiancé) and I were leaving Los Angeles I pulled a lot of money out of the market. We didn’t know where we would end up living, or what we would do, and there was the potential of buying a house when we did land somewhere. And for all of those reasons I wanted to have a lot of cash on hand. I didn’t want to be in a position where I was selling stock during a market sell off in order to pay our bills or to buy a house. I wanted to take my gains while they were there. I had played the waiting game before, and lost.

I also was very focused, and still am, on consolidating my portfolio. Trying to get the number of positions I held from 20 down to 10 or less. So, after going back and forth, reviewing my portfolio non-stop, I ultimately pulled the trigger and sold off a handful of stocks. I got my cash, and consolidated my portfolio. Progress on two fronts.

Two of the stocks I sold were Netflix and Uber. Both stocks had been on a bumpy ride up until that point. Hitting all time highs followed by huge sell offs. They were too volatile, and their volatility was causing me undo stress. I could no longer look at them and wish them to return to their highs. It was more important to dump them, free my mind, and get the cash. So, that’s what I did.

When I sold Netflix it was trading at $365. It now trades close to $1,000. When I sold Uber it was trading in the $40s. It recently hit an all time high of $87.

From a pure dollar perspective this was a terribly bad move, but the problem with assessing it that was is that it gives no value to the mental aspect of it. That yes, in hind-sight, I could’ve kept both, only sold a handful of shares. But had I done that I would’ve still been putting energy into watching them pop and then retreat. Trying to will them to go up, and stay there. It also would’ve been two more stocks in my portfolio, distracting me from my goal of consolidating. Two more stocks to watch, spreading my attention thin. And while I can’t quantify the value of giving myself the mental room to breath, in my experience it’s benefits far outweighs any dollar amount.

Because I believe that when you get stuck at a decision point, and you let it linger for too long, it starts to consume you, and it prevents you from making progress everywhere else in your life. I belie that when you have a desire to do something, or a need to do something, that’s your intuition calling to you. That’s your gut telling you what to do, and if you ignore it, it has ripple effects throughout the rest of your life. When this happens the call of your intuition starts to get drowned out, and quieter, and dull, until you can longer hear it or recognize it. And the more you ignore it, the worse it gets, until you’re paralyzed with indecision, and it starts to feel like nothing can go your way. And I think that following our intuition, that internal calling we all have, is what leads us on our path to the life we were meant to live.

Now the interesting and amazing part is that at any time you can get that voice back. You can reignite that calling and get back on your path by finally pulling the trigger. Releasing yourself and your mind from that roadblock, and allowing that voice back in to help determine what it is you need to do next.

Lessons Learned Over My Last 5 Years of Investing

Over the last five years I’ve spent a lot of time paying attention to my finances. I received my last W2 paycheck in February 2019, so I’ve have a lot of incentive to. Since that time I’ve survived on money saved and money invested. 

When I first left my job I did’t know much about investing. I did’t know much about the stock market and I had limited exposure to it. Aside from a company 401K (with no match) and the purchase of a 1-bedroom apartment, I had barely any money invested. If it wasn’t for a week long crash course in investing and the market during a vacation with a friend, I would’ve never gotten started.

Over the years since that trip I’ve applied what he taught me to run a mostly successful portfolio. That said, with experience has come a handful of lessons, some of which I’m sharing here.

You have to take your money off the table when you get it. 

The stock market has a genius way of lulling you into thinking you’ve made money (in some cases a little, in some case a lot), and that you will continue to do so forever (as has been the case with the bull market over the last 10+ years, the brief “recession” at the beginning of COVID not included). But it’s important to realize that the only time you make money is when you take some off the table and sell some of your position. Until then it is all at risk. If you’ve sold zero shares, you’ve made zero dollars.

The feeling you’ll encounter is FOMO, missing out on more gains (greed). There’s a great saying I’ve heard multiple times recently.

“Bulls make money. Bears make money. Pigs get slaughtered.”

To overcome that fear you have to ask yourself two questions and be honest.

1. If you wouldn’t sell some shares at a 50% gain, would you really sell at 60%, 70%? Probably not. If you’re unwilling to sell at 50%, greed has likely set in a you’ve become disillusioned that your stocks will only ever go up.

2. Will you be more satisfied taking your gain or watching your gain turn into a loss? This one is obvious but it’s one that feels like it could never happen to you… until it does. Like it has to me on several different occasions.

It is a much better strategy to take gains you can live with, and wait for the next opportunity.

There will always be an opportunity to make more money.

This is a rule that applies to everything in life, but is particularly true when it comes to finance, investing and business. It’s easy to get excited when presented with an opportunity to make money, but most investment opportunities will come with little to no returns.

I’ve been presented a wide array of business ideas to invest in. An email organizer that’s a plug-in for Gmail. A women’s focused wellness brand. Hotel development. An AI focused relationship management system. I’ve passed on most, and invested in the ones with guaranteed returns (i.e. preferred rates of return in real estate).

Jumping at every opportunity thrown your way is a good way to lose a bunch of money and come unhinged. It’s something I saw at my job. Our inability to pass on growth opportunities (whether they were clearly risky or just didn’t make sense) was the main reason for the companies eventual demise.

When it comes to stocks, we all want to own the next Tesla. But picking Tesla to be a winner is a crap shoot. My friends father who is widely successful, sold all of his position in Tesla before it took off. He had a feeling it would do well (which is why he bought it) but he ultimately cashed in when he thought it was a dud.

It’s important to take some risks in your portfolio, but not every IPO (initial public offering) is going to be successful (in fact if you read this newsletter you’ll see the trend is in fact the opposite). For every Tesla missed, another one will arise. Pay attention for the one that makes the most sense for your portfolio (as Sam Dogen puts it, a company you use, like and trust). 

For every opportunity missed, another one is right around the corner.

When everything is important, nothing is important.

There has been a handful of times in the last five years where I’ve had more than 20 individual stocks in my portfolio. I foolishly believed that I (since I was not working and had the time) could effectively manage a portfolio of this size. The gains in the market from 2018 up until and past the pandemic crash made me believe I was right. But once the bottom started to fall out of many of the companies in my portfolio, I quickly realized I was wrong.

Instead I’ve refocused my strategy and I’ve been focusing on thinning my portfolio down to less than 10 stocks made up of some of the main stays (Apple, Microsoft, Amazon), some diversification (Kimco real estate investment trust, REIT) and mostly the Vanguard ETF VTI. A portfolio this size, with companies I “know” is manageable.

From time to time I’ll pick up a new individual stock that seems poised for gains, but I keep making myself come back to the lesson, when everything is important, nothing is important.

Money is very personal.

This is probably the most important less of them all. It’s something that Morgan Housel talks about in his book The Psychology of Money, and it’s something that Sam Dogen (aka The Financial Samurai) talks about on his blog and in his book Buy This Not That. 

The example Morgan Housel uses is paying for his house in all cash as opposed to taking out a mortgage. Almost anyone you ask will tell you that taking out a mortgage is the right choice, especially in times when interest rates are at historical lows (like they were up until the last couple of years) and the market is returning near double digit average returns. But as Morgan puts it, he just didn’t want the weight of a monthly mortgage payment hanging over him.

I’ve recently had a similar experience. Over the last few months I’ve liquidated 20 - 30% of my stock portfolio to have some extra cash reserves as my girlfriend and I make a move to Colorado. I’m a believer in compounding gains, but in this case I’d rather feel secure knowing the cash is there when we need it, then having to liquidate positions when (if) the market takes a downturn.

The thought of having to sell stocks for bills when the market is not performing is one of the main things that will keep me up at night. Conversely, even if the market takes off, and I have cash on the sideline, I feel good knowing my gains are secure. For sure the 5% return on my cash sitting in a money market fund helps, but I’ve already seen some missing gains on positions sold that I’ve had to learn to accept. 

I’d rather feel secure knowing I have the cash.