Slowing down to avoid mistakes

Declining prices can be very frightening, especially for investors who have not experienced a bear market. This was certainly the case during the dot-com crash, the financial crisis, and the early days of the pandemic. In mid-June of 2022, we are now well into another bear market driven by high inflation and rising interest rates. 

The worst mistake most investors make is that they take market quotations too seriously. People need firm anchors in their lives in order to feel a sense of security and safety. When markets go crazy, there is no firm anchor to be found in quotations. If you believe that the latest quotes have significant negative implications for your financial future, it is going to be impossible to view a bear market dispassionately

Fortunately, we can choose what to anchor to, and it doesn’t have to be market quotations. If you are a long-term investor who owns individual securities, you should have an independent estimate of the intrinsic value of what you own. You should anchor to that value, not market quotes that are changing by the nano-second.

This does not mean that long-term investors should not adjust their assessment of intrinsic value when the world changes. But acting quickly and emotionally, before you can gather the necessary information to either confirm or disconfirm your view of intrinsic value, is a major error. Unfortunately, today’s world is optimized for instant decisions, not careful thought and dispassionate analysis.

There are at least three ways in which I purposely throw sand in the gears when it comes to dealing with investments:

First, I do not have any trading apps installed on my phone. If I want to log into my brokerage account, I have to do so on my computer. I also purposely use a brokerage with a user interface that is not optimized for trading. Vanguard’s badly outdated user interface is considered a weakness, but I think of it as a feature rather than a bug. 

Second, I strictly segregate my investment accounts from my personal accounts. I treat my investments as I would treat a business. The only cash that I have available to work with in my brokerage account is idle cash committed to the business. Cash that I have in my personal accounts is not available for investment at all unless I transfer it to my brokerage account, a process that takes at least a couple of days. 

Third, I use Treasury Direct to hold the reserve assets that represent the funds I will use for consumption purposes for several years. Treasury Direct’s website is so archaic that it makes Vanguard look modern in comparison. Even better, while you can purchase treasury securities via Treasury Direct, you cannot sell them there.1 You must either wait for them to mature or go through an involved process to transfer them to a brokerage before selling them.

I’m sure some readers have concluded that this approach is stupid because it reduces my optionality. What if the market crashes to the point where I want to take advantage of the opportunity by putting cash to work? Well, I can do so with the funds in my brokerage account dedicated to my investment business. But I cannot get overenthusiastic and invest the reserve assets I will need over the next year into stocks without going through a time-consuming transfer process.

I know from prior experience that I am much more likely to want to buy stocks during a bear market rather than panic sell. Since I own companies in normal times that I believe will provide good returns over the long-term, my usual reaction to a market decline is to want to buy even more of what I already own. 

But I need to prevent myself from investing cash reserves that I will need in the near future. It doesn’t matter how great of a deal I’m getting. It is always a mistake to need markets to perform in a certain way in the short-run. 

My ability to treat market fluctuations with equanimity would be destroyed. Equanimity would be replaced by anxiety. I would obsess over quotes because I would need the stock to perform so I could replenish the cash that I require over the next few years. Such anxiety could easily lead to panic selling at the worst possible time.

The only way to avoid panic during a bear market is by having enough liquidity to know that I will not become a forced seller anytime soon. In order to ensure that I keep such liquidity under all circumstances, I purposely throw sand in the gears and make it difficult to invest these reserve funds in stocks.


Throwing Sand in the Gears
  1. While you cannot sell treasury securities (bills, notes, and bonds) using the Treasury Direct system, you can sell United States savings bonds as long as they have been held for at least one year. []
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