A reader recently asked me whether I ever get nervous before a big investment, like buying shares. A better question would perhaps be when am I not nervous? Although my post today takes investing in the share market as an example, it’s really relevant to almost any worry. Not only investing anxiety and money troubles, but general concerns that keep you up at night.
Start out small
Laying a lot of money on the line is scary. Especially if you’re not 100% sure you know what you’re doing. That’s why, as I mentioned in my last post, I recommend starting out small.
We started by buying a couple of parcels of shares, $1,000 at a time. Of course, $1,000 was (and still is) a lot of money to us. But I don’t think I would have had the stomach to be able to put through trades of larger sums later on had I not started with these smaller ones and gotten comfortable with the process.
I remember, as a kid, feeling like a $1 or $2 coin – the gold ones – was a lot of money. That was a whole week’s pocket money for me back then. Then $5 – the smallest note – seemed a lot of money. Then $20, and $50 etc. Later, when I moved out of home, $100 felt like a lot, and when I got a job, having $1,000 in my bank account felt like a lot… I don’t think it’s easy to just jump from zero experience to investing, say, $10,000.
Go on an information diet
Even when you start out small and slow, investing can still be quite overwhelming and scary.
Australian investors in particular have a well-documented love affair with ‘bricks and mortar’. Part of the reason, as I mentioned in a previous post, may be attributable to the language of the sharemarket vs. the much more familiar language of real estate.
Bizarrely, I found pressing the button to put in my first order for shares online more scary in some ways than signing the papers to buy a property, even though the amount of money involved was quite a lot less.
The perils of instant feedback
Quite apart from levels of familiarity with shares vs. real estate (I felt equally well equipped having spent quite some time researching both), I think part of this has to do with the fact that with shares, you get instantaneous feedback.
As soon as you own the shares, the platform will show you whether you have lost or gained money. The very second after you have bought it. That can be quite stomach-churning.
Say you invest $10,000. Just a 0.5% drop will immediately show as a loss of $500. When you think about how many hours it took you to earn that $500, and you see it disappear like that, in just a second, it can make you feel quite sick at first. And the loss doesn’t even have to be that substantial. Even if your entire $10,000 parcel of shares drops by just $1 to $9,999, the figure will show in red with a horrible down arrow next to it, and at a glance, it ‘looks’ just as bad. In that split second, it can also feel just as bad. Just like red numbers on a bill, red numbers on a computer screen can make your stomach sink.
I think this is a big reason people often prefer property over shares. Houses don’t have a great big flashing sign over them telling you up to the minute accounts of how much your property is worth. They don’t blink enormous neon numbers every time someone walks past and thinks you paid 50c too much or $1 too little or whatever.
Watching the price of a share you have purchased is like getting thousands of uninvited opinions every minute. Kind of like how spending too much time on social media can drive you nuts, worrying about how many likes you’re getting, comparing your life to others’, and experiencing FOMO.
A great antidote to this is the book How I Made $2 Million on the Stock Market. Although it is dated (referring to telegrams etc.) its message is pretty timeless. I took this book’s advice and deleted the stock market app on my computer once I’d finished putting together our portfolio. I just realised it wasn’t doing anything useful for me.
Knowing up-to-the-minute prices was helpful when I was actively purchasing shares. It’s nice to be able to get a few dozen extra shares by timing your purchase well. But it was totally useless – and detrimental to my sanity! – to know the price thereafter. Mr. Money Mustache even goes so far as recommending a low-information diet generally.
Have a touchstone
Back when I was supervising honours, research masters and PhD students, I would encourage them to write their research aims on a piece of paper and stick it above their computer screen or desk. When undertaking any complex project, it’s easy to get lost. Having a touchstone makes it much easier to cut through the BS and find your way again.
Once, my younger brother was in the lounge room when I had my share portfolio open. I told him I didn’t mind him seeing as I hoped it might make him more comfortable about his own potential future investments. But he told me he couldn’t stand to watch. That seeing all of the red and green, the arrows, and the total at the bottom of the page being positive, then negative, then back and forth again, made him feel sick.
By that stage, however, I had learned to deal with it.
Because the thing is, so much of it is just noise that you need to tune out.
If you are investing for the long term, because you believe a company has solid fundamentals, today’s price, let alone this hour’s price, or this minute’s price means very little. Often, it’s no more than a source of stress. Even if your shares have gone up, the split second it takes for your brain – or at least my brain – to read the price leaves plenty of time for the worrying part of my brain to kick in!
Going back to that $10,000 example – chances are, there is nothing that has happened between say 10:01:53 and 10:01:54 which has made your shares lose $500 in value.
The company’s sales haven’t dropped, their profitability hasn’t dropped, the CEO hasn’t announced some insane policy. It’s just a tiny fluctuation that, in the grand scheme of things, doesn’t matter.
Benjamin Graham, who wrote the superb book The Intelligent Investor, said
‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’
In other words, the share price is just what investors think a particular share is worth, what they are willing to pay for it, at that moment. And that doesn’t always have to do with the underlying value of the company. Cloudy days, I kid you not, make people more pessimistic, and sharemarkets often go down. The announcement of war, which you might think would cause investors to panic, on the contrary, can make markets soar, because investors tend to prefer ‘certainty’. Even if that certainty is horrible, investors often prefer it over a ‘will they/won’t they’ scenario. Yet neither of these necessarily affect the underlying value of a company (unless it makes umbrellas or guns of course)!
Don’t follow the crowd without thinking
It’s also important to remember that the sharemarket isn’t just inhabited by investors. It’s also shared by traders, who are looking for short-term profits. They do little or even no research into what a company does. Generally, they don’t care.
In short, as Graham says, day-to-day, people just vote on what they think companies are worth. Sometimes, their opinions are worthless. But in the long run, the value of a company is usually demonstrated in its price rising over the long term as the market weighs it up. If you take a look at the price chart for any share, you will see the little daily, weekly, or monthly wiggles – those are the daily votes, the ‘noise’ an investor learns to tune out. But the longer-term trend is more like the considered weighing of the scales.
Investing, life and worries
With shares – as in life more generally – there are so many things to ‘worry’ about or to ‘regret’. If you buy at $2, and the next day it’s at $1, you’ll be kicking yourself. Yet if you decide a share is overpriced at $2 and give it a miss, but the next day it’s up to $3, you’ll be similarly angry. If you buy at $2, the share goes up miraculously to $20, but you hold on and don’t sell until it drops to $12, chances are, instead of celebrating the $10 you made, you’ll be mourning the $8 you ‘lost’.
If you don’t buy a share that everyone is raving about, you’ll feel like you’re missing out. But if you do buy a share that everyone is raving about and it turns out to be a dud, you’ll wish you hadn’t followed the crowd.
If you bought a share for its great dividend, and then it stops paying out, you’ll be disappointed. But if you bought a share expecting a 5% growth and it only grows 4%, there’s more grounds for disappointment.
Rather than focusing on what the market thinks right this instant, go back to your aims. If your aim is to invest for long-term growth, and your chosen company’s fundamentals still look solid, it shouldn’t matter whether the price has dropped a bit.
Understand your feelings
I’m not one for wishy-washy self-help type advice. But I do believe it is important to recognise the enormous role that emotions play in our decision-making. After all, if a cloudy day can affect the markets’ performance overall, it’s obvious that (irrelevant) human feelings do influence our perceptions of value.
By acknowledging our emotions and analysing their origins, we can change both our feelings and our behaviour.
I’ve mentioned before the importance of ‘saturation‘. This entails researching in such depth and breadth that eventually, you come across no new information. Not because you are stuck in a bubble, but because you have read and listened and watched so thoroughly.
Are you prepared enough?
Perhaps your investing jitters are because you don’t yet have enough knowledge to proceed with confidence. If you haven’t yet reached saturation, check out my posts on how to avoid bad financial advice, and find good advice. Read more. And broadly. The Intelligent Investor is one great place to start.
Have you over prepared?
On the other hand, if you have reached, or perhaps even passed the saturation point, you may have slipped into ‘analysis paralysis’. The state of being unable to make any decision, and feeling like you need to keep learning infinitely without progressing.
Again, back when I was teaching, I would sometimes come across students who were in such a state (and I, of course, have experienced it too!). The cure to analysis paralysis is not to keep on reading, indefinitely postponing any productive action. At some stage, when you’re writing a thesis, you have to put pen to paper. Similarly, there’s a time when, in order to learn to cook or sew or perform an operation or do carpentry, you have to pick up a sharp implement and make a first cut.
The best explanation of the physical symptoms of worry I have ever come across is one aimed at kids. Check it out. Learn to identify the physical symptoms of worry, and stop your anxiety from spiraling. Also take a look at How I Made $2 Million on the Stock Market and see whether any of its lessons might work for you.
How to tell if you are over- or under-prepared:
This advice is for everyone: figure out your touchstone. Develop your goals. Find an investing philosophy that works for you. (I’ll write a post on this in future if there’s enough interest. Let me know what you think!) Write these down and measure what you do according to your aims. Do you have enough knowledge to achieve your aims? Are you worrying about something that is unrelated to your long-term goals? Your touchstone will guide you.