Capitalist Investor

Navigating Volatility: Mastering the Psychology and Emotions of Investment Decisions, Ep. 316

• Strategic Wealth Partners

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 In this week's episode of the Capitalist Investor podcast, hosted by Diamond Hands D and co-hosted by Tony, there were several key topics discussed around the complex dynamics of investing in volatile markets. Here are the five hot topics that were tackled in the episode:

  1. Psychology of Investing in Volatile Markets: The conversation began with how current market volatility heightens the need to understand the psychology of investing. Diamond Hands D and Tony discussed how emotions like fear and greed can cloud judgment and lead to rash financial decisions.
  2. Behavioral Finance and Herd Mentality: An intriguing part of the discussion revolved around common psychological biases such as herd mentality, where investors follow the crowd, using Bitcoin as a key example. They pointed out how this trend often overlooks the realities of market conditions, leading to irrational investment decisions.
  3. Emotional Detachment and Long-Term Strategy: The hosts highlighted the importance of developing a long-term investment perspective and emotional detachment. They stressed the need for a clear investment plan, understanding one's risk tolerance, and the role of diversification to weather market volatility.
  4. Practical Investment Tips: Throughout the episode, Diamond Hands D and Tony offered practical tips for maintaining rationality in investing. This included advice on investing only in what you understand, the significance of value investing, and the pitfalls of market timing.
  5. Professional Guidance and Continuous Learning: The episode underscored the value of seeking professional advice to help navigate complex market conditions and remove emotional biases from decision-making. Additionally, they suggested continuous learning to stay informed but warned against the potential biases of certain market commentaries.

Listeners who tuned in were given a comprehensive look at how psychological factors can significantly impact investment decisions and strategies to manage them effectively.

On this week's podcast for the Capitalist Investor, with the market being so volatile right now, we're going to talk about the psychology, investing, overcoming fear and greed, and essentially behavioral finance and the issues that come along with it. Hey, everybody, and welcome to the Capitalist Investor. How you doing, Tony? Good, man. Good to see you. Diamond hands. Are they still diamond? Oh, they're definitely diamonds. All right. Yeah. I haven't sold anything in years. I like it. Yeah, I like it. Before we get into today's topic, the psychology of investing, Fear, greed, behavioral finance, things like that. I do want to mention the Masters. I'm going to ring my own bell. Yep. I did, you know, call out Roy. I had a very strong feeling on this one and I was involved. But, man, like you said before, like, what a. What a. What a mess. On. Yeah, it was. It was hard to watch, honestly. Yeah, it really was. They were like, oh, it's going to be a two horse race. And then it became like a five horse race quickly. Well, you thought Rory was going to pull away, and then he put it in the drink on 13 from 120 yards out. He like, that's a par five he laid up. That's the one with Ray's Creek. Yeah. And. Yeah, just one of the worst golf shots you'll. You'll ever see. No, the worst golf shot could have been his shot into the green from 120 yards away on the 18th hole and put it in the bunker. That was bad. That was a bad shot. And then, I mean, he got out of the bunker and I'm like, he needs to be within three feet. And he was like five feet. And I'm like, oh, my God, we're. We're 50. 50. Yep. So. But great tournaments. Yeah. It was nice to see competitive golf. A lot of people, a lot of. A lot of. I don't think a lot of. Some of the action was off the course, you know, because, I mean, Rory was, you know, pre market, you know, or pre tournament, like six to one or something. So you got people probably throwing money down. So it was a. It was very. It was just fun to watch. It was. I love the Masters, so. All right, man, let's get into this. Psychology, investing. So I think it's a very important time to talk about this because the market is so volatile. I don't even want to call it. Val. It's just like the Trump, get ready, buckle up. It's going to be like this for the next three and a half years, I feel. And I don't Even know if it is. I know it was volatile. It's kind of calmed down because before President Trump came out and showed his tariff board, the market priced in, 8% drawback, like it was already priced in. They were expecting something like, hey guys, I'm just going to reiterate this. And then he came out, he was extremely aggressive, very hawkish on all of these tariffs, and the market fell off another 10%. The market did not price that in. But as, again, and then as he went silent over the weekend and you're getting quote unquote phone calls and people want to negotiate and then you get a 90 day pause. Like what happens. The old saying is some of the best days in the market come not that far behind the worst days. Yep, that's exactly what happened within two weeks. Yep. So the power of investing, it's very emotional because we save our money and we expect it to grow and one day we want to stop working. Right. But then we get clouded judgment because of fear and greed. And I actually think this, it makes our judgment cloudy, very irrational. And I feel like in today's instantaneous, you know, information and instantaneous gratification and the way everything works today, like one year seems like a decade, you know, like, hey, last year was great. And then we get one week of volatility and it's like everyone's like, where's the ripcord? Right. So we need to, we need to understand our emotions so that we can be successful. So, and that's, and that's what behavioral finance is. So you mentioned that up top. You know, so that's, that's essentially the study of how people, you know, emotions, their emotions take over, you know, when they are investing both, both on the buy side and the sell side, both on the high and the low. So it's a, you know, being in this business for, for a while now, you, you know, you, you understand exactly how, how, how real and how powerful that is because it happens every single time. You know, we just went through it with the tariffs and, and, and, and, and just news reports. Right. Remember, must have been about two weeks ago now. There was like a false report of, of the 90 day pause. Yeah. In the market, it was down 2% and it went up 4% and then they said it was false and then went back down again. So it is, it is a, it is a roller coaster. So. Yeah, and it's all, and I don't want to say all, but a great deal of it is, is based on emotions. Yep. So some of the Common. You know, psychological biases are first and foremost, the herd mentality. Absolutely. Following the crowd. And the thing that comes to mind, the most recent is bitcoin. I mean, like, I've been like, man, I just don't understand, blah, blah, blah. And then, and then it, and then it was mooning, you know, going, going up. And I was like, well, just recently, I mean, right before the election, because Trump's like, hey, I'm going to get a bitcoin reserve. And that fizzled out. Like bitcoin was at 120. I think it's at 80. 80,000 a coin or whatever. Right? Yeah. And people before, like, oh my God, this thing's going to 200 and where's all the honkers now? Like, again, I'm involved, but like, not, not that much. Like, it's like a, it's like a commodity. It's like gold. Like how much. You know, there's some people loading up on gold and if you've made that, that, you know, that move, you've been very well. But this is. Gold is getting into uncharted, uncharted territory. Right. So, but bitcoin, I like, that's the perfect example. Bitcoin, I need it. But you know, and it's like, I understand it long term, but I don't think it's just gonna moon and get high and go to 200 and just stay there. And it's gonna come with high volatility, confirmation bias. It's like, I'm gonna read what I want and I'm gonna read what I'm gonna read. The same person. You know, I think if you read. God, I think. I can't think of his name off the top of my head. Peter Shift. If you. And like, you might not have ever made any money with that guy because he's always bearish. Right? Right. Like everything. You would have never made the money. Right. And you'll. So that's one thing. And then opposing views, like, I'm just so bullish. I don't want to repeat or shift. Right. I mean, I like to read everybody and, and try and vet like what they're saying. Right. And then the last one is lost loss aversion. You know, feeling the pain of loss more intensely than the pleasure of gain. 2022 was a bad year. The market was down in the bond. The stocks were down and bonds were bound, were down. But the next two years were up 20 plus percent on the S&P 500. That has only happened five times in the last hundred years. It does not happen that often. Right. Less than 5% of the time. Come on, like, like you don't think we have to give something back? Like, I felt like, you know, and we could still end like if they're like, as of today, China's like, hey, we want to, we want to negotiate. But they're being very tactful. Like, hey, we're going to get a mediator and you actually better get a mediator because we don't want Trump at the table. Like you, you could talk to them after my guys talk, but like they don't, they want to have a very constructive meeting rather than like get everything laid out and approved before they go face to face is essentially what I'm reading today. Yep. Again, that is, there has been, and after we see that, we could see another bump in this market. We could be flat for the year and that would be a victory after two 20 plus percent years, right? Yeah, absolutely. I mean, look what happened just on one tweet. I mean, and it's since that tweet and the market went up, you know, I think they asked him, what was that? Was that the tweet that, where Trump's like, get involved or buy now or buy low or what? What is that? Is that the one you're talking about? That one out in the morning and. Then, and then the buy guys, like. Yeah, I, I, I was going to buy on that tweet, I swear to God. It didn't get, I didn't get any, any trades in because we were too busy. But, but yeah, you know, it's, it's, it's, it's fascinating because you can see all this stuff too in like everyday life, right? So like confirmation bias, like look, look at, look at the, you know, the cable news networks, right? You know, there's, there's no conservatives watching CNN and there's no, you know, liberals watching Fox. Yeah, you go to what you want to hear, right? Yeah, I'm going to the echo chamber. I'm going to, I'm going to touch on this a little bit later about like continuous learning and things like that and how to build a strong mentality about, you know, a way to break that confirmation bias is take a look at a couple things. Like our investment team, they look at macro, fundamental and technical analysis. So I'll come, we'll come back to that. But we do have some solutions to some of these. Absolutely. All right, so strategies to overcome this. Obviously there's diversification, spread out your investments. Everyone's beaten over the head with that one long term perspective, that one's a little tougher because again, everyone forgot the last two years and now we're down 8%. And then that's just the index. I've looked, I've taken a look at client accounts and they're not that, they're not down as much as the index, I'll tell you that right now. Right. Depending on how they're invested, you know, it's almost flat, you know, plus or minus 2% probably at this, at this moment. But again, everyone's different. You know, there's some people that are going crazy and they are down as much as the index. So. But when my team gets involved, they're balancing this stuff out and looking for a long term perspective, not the short term, hey, what can pop tomorrow? That's not the goal. And then emotional detachment, you know, developing a plan and sticking to it. Avoid the impulses. That is very, very important. And it's market noise. It's very hard to disconnect from the macro news nowadays because it's just in our face. And then it's even amplified with President Trump. But those are, those are things that we need to focus on. Diversification, long term perspective and detachment. You know, I think emotional detachment is huge, especially when it comes to picking stocks. It's the hardest. Yeah. So it's, you know, obviously it's happened before and we've picked lots of stocks, but, you know, it seems whenever I pick a stock from my personal portfolio, it almost, it goes down almost immediately. Right. You know, and, and, and we're in this every day. So if I'm actually buying a stock, it means I'm pretty convicted on it. I'm not, you know, day trading or anything, anything close to that. So, you know, to, to find a stock, you, you, you, you pick it out, you're attached to it, you got a bunch of reasons why it's going to go up. And then you buy it and it drops 10%. You know, it, it is, it is very difficult not to get, have emotions come in there. Right. Yeah. And you know, at that point, the problem for most people is admitting that you're wrong. Right. Could be having a point where if it crosses over, hey, I made a bad trade, I got to get out of this stock. It's dropped past my, my threshold. Whether that's, you know, 10%, 20%, I don't want to jump ahead. But, but I've seen, I've just, I've seen our investment team do that on both spectrums. Oh yeah. Where they have bought a Stock and within two weeks it went up 30%. Like, wow, guys. Like, that wasn't supposed to happen. Like, we're, we're trying to buy stocks that are just some news came out automatically on a stock and they're like, they, they got out. Yep. They didn't say, oh my God, this thing is going to, it's 30. It's already up. It's up 30% in the last three days. Like, why can't it go to 50? They're like, hey, we hit a target, we're going to, we're going to exit the position. Yep. And, and we're not day traders by any means, but they do that on the back end too. It's like, hey, we got into a position. They know where you know, it's somewhere sometimes between 10 and 20%. Like downward trend is like, hey, it was the bad time. It was a, it was a bad time to get in. And we're going to sell it, lick our wounds and recalibrate and look for the next thing to get back to even. But that's why we also carry 50 stocks. Right. You know, and not over allocate to, you know, all of these things. So let's, let's kind of get on to the emotional detachment. So how do you build a strong investment mindset? So develop a clear investment plan, have goals. What is the goal with this money? What are your retirement goals? Like, there's goals can, there's probably three or four different layers to that. Right. What is your risk tolerance? Are you scared of your shadow when you're investing or are you going to stomach a minus 20 when you first get in? Derek, like you said, like, hey, I get in, it just immediately goes down. Do you immediately sell? No. Okay, that's good. I mean that's, that's, that's, that's impressive. But, but if it, you know, if it went past my threshold, I definitely would sell. Yeah. Right. But most people, you know, like, if you have a long term mentality, like risk tolerance shouldn't be. It's there, but it's again, like I don't want to put somebody outside of their comfort zone either. Right. And then the investment strategy. So what does that mean? Do we want to build a portfolio for income growth? Low beta stocks where they're not volatile, or high beta stocks where they are volatile? Can you have a blend of all of it? Yeah, depending on, you know, how much money you have and how sophisticated we can get with different strategies. But some people don't have that luxury. You know, we have to, you know, have a blend of, you know, of both so that we can be successful, seek professional advice. You know, and this is where, you know, this is where we kind of come in. Some people that I have talked to in the past that didn't become clients of our firm, you know, they can't overcome, you know, the fee that it takes us to make, to help take the emotional stress out of this. Right. They take a look at this in. And sometimes it's not about investing. I say this, I'll kind of detach just a little bit. But sometimes it's not about the actual investment accounts. It's about retiring on time, building a plan to make sure you're not spending overspending in retirement, making sure you, again, retire on time, when to turn in Social Security, you name it. Like, hey, can I buy a second house right now that I'm retired? I want to get out of Cleveland, get out of the cold, whatever, you know, wherever you might be living. And then taxes. I always say this. And like, hey, when we, when we incorporate the tax professional with our clients. Yeah. There's a, there's a number on your statement on how much money you made or lost that month, that quarter, that year. But there's also a number that's just not going to show up there, and that's how much money lands at the bottom of your checking account. Because there was a tax move. I can't strap that onto your investment portfolio. I can't. I can't do that. But if you can realize what, what the bigger picture is, and doing things efficiently actually adds percentage points and alpha to your overall investment strategy. Yep. Yeah. I think, I think seeking professional advice is, you know, what we're, the subject we're talking about today. That's one of the main things that, that they should help you do is help you pull the emotions out of investing. Right. And I always say this, like, focus on what you're good at. I use this analogy because I'm kind of handy, but I also don't know. It's just, I know what I'm good at. And if my sink starts leaking, I'm going to turn the water off. I know where that button is. Right. But I'm going to call a plumber because once you, once there's a problem with your plumbing, man, like, water finds the weakest link. And I don't need a foot of water in my basement. Right, right. And same thing with electricity. I don't want to kill myself. You're not. Don't mess with that. Yeah, so, but yeah, I was going. To say the, so detaching the emotions is one of the big things from professional advice, but it's also helping you set goals. You know, how often do we, you know, sit down with people, you know, you know, you know, people we haven't talked to yet and they're, they're just so laser focused on returns, returns, returns, returns. You know, what, you know, what is your return versus the S&P 500. Obviously that, that stuff is important, but this goes back to setting your plan, you know, especially as you're approaching retirement. When you're approaching retirement, you don't need to be hopefully hitting home runs in the market. You know, if you do, then, then you should probably take a look at your plan. Yeah. You know, it's not necessarily just about getting conservative. Just for getting conservative. It's about having a plan. Right. You need to understand what we need to get, you know, what's the bogey and what's, what does the diversification mix look like to get there? Yeah. You know, is reducing that overall risk. So, so you can sleep well at night. Yeah. And I think, and you know, you have more and more conversations. It's for, for people who are overly emotional, they are tied to that investment return number and it doesn't, it should, it shouldn't be that way. Yeah. Mark Tepper here from SWP Investment Management. It's time to elevate your portfolio with the SWP Growth and Income etf, a diversified basket of high quality growth companies that pay dividends. SWP stands out from the pack because total returns matter. Don't just Invest. Thrive with SWP. Visit investswp.com for more information. Disclosures apply. The other thing is, is that you know, and then also to build a strong investment mindset is continuous learning. Yep. But this could be a double edged sword. Right. Because now you could be listening to unbiased opinions like Kramer. Right. I think that guy's owned every stock and he owns an index fund. Right. Because he's like, he's got an opinion about every stock and it changes because the environment changes. He might like Emerson Electric right now, but he might hate it in two years. And I don't know, like again, so we have to understand where we're getting our information from. And, and I was touching base on this before. That's why our like I, I every two weeks when we listen to our investment team, they give us the macro picture, what's going on around us, what's happening on tv the macro analysis so that they can explain to the. The fundamentals, right? Saying, hey, we're going to be in a volatile time. Like, we should probably start looking at more value stocks than growth stocks. Right? Right. Because the growth stocks are going to be most affected by tariffs. And then also. But then there's the. Then there's this thing where, like, hey, the Fed might be cutting. Well, guess what? That's. That's good for, you know, growth stocks. Right? So, like, there's this pool and, you know, so how do you navigate through those two things? Because they're conflicting, and then technical analysis, just because you like something, it might not be the right time to buy in. It might be overvalued. As you're looking at it, this is huge. Yeah, yeah. And I know that there's a couple examples that I know of my team, and it's like, hey, it's on our radar. It popped 10, you know, 10% in the last three days, and now it's continued to be on our radar. We were about to buy it, and we missed it because there was a geopolitical macro event. There was a. You were looking at General Dynamics, right. You know, as a. Just an example, and they didn't buy it for quite some time. They. After the war in Israel happened, like, and that stock took off because it's a. It's a defense company. So. Yes, you know, Peloton is a great example of basically everything that you just said. You know, remember that stock during the pandemic and, you know, it went from, oh, my God, 19 to, you know, $200. You know, relative value is. Is definitely a thing, you know, and that. Because everyone has an opinion, right? If, you know, say company A, B, or C, everyone, you know, has a, A thought when, When. When you say that, that name. But it's not just about the name. It's about what they're doing, you know, what they're producing and how expensive the stock is. I know that sounds simple, but when I, you know, when I'm, you know, out talking to people, everyone has an opinion on, on this stock, and it's a great company, but it may be a great company, but it might not be about a great investment right now just based on. On the price. And actually, by the time you realize, like, hey, my God, like, I didn't even think of that stock, you're too late. Like, there's a reason you found out as the, the general investor. Yep. You're. You're. You're behind the eight ball already. Is there still, you know, maybe juice to squeeze out of Peloton. Maybe you saw it, like you said, would it go from 20 to 200? Yeah. Maybe you caught it at 100 and you're like, you still got 50% gain, but you didn't get 8x. Right, right. You got 1x or 2x. Right. But I wonder how many people, you know, got in at a decent level and wrote it all the way up and then wrote it all the way down because they're emotionally attached to that investment and they saw how much money was in their account before and, and they just want that feeling back. You know, that that's, that is, that's exactly what we're talking about here. All right, so as we wrap this up, you know, some practical tips for the rational and investing is invest in what you understand. Right? It, that's kind of like, you know, personally, it's like Bitcoin. Like, I understand what it is. I know, I know what, I know what it can do. But like, I'm just trying to be practical, man. I cannot take my, my crypto thumb drive and buy gas for my car. I can't do that. At least I don't. Not that I know of. So again, understand, invest in what you understand and then, you know, and then we also need to understand that like, it can be high risk, like bitcoin. I keep on using it as an example. But when you're going to be high beta, high volatility stocks, invest in what you invest in what you're willing to lose. Because this, you know, bitcoin micro cap stocks, like Peloton, again, I'll bolt on to that. It's like, invest in what you know. Yeah, we know it's a bike. Do you know anything about the fundamentals? I know that everyone's trying to buy one and they're sold out. And that's why the bike, the bike's flying off and everyone's locked at home. What happens when we get out of our cages after, you know, you know, the stay at home stocks are over. What happened? It's crashed. Yep. Thanks. Do they even make them anymore? Yeah, they have. Yeah. Right. Yeah. But, you know, now it's properly valued, you know, it's a, it's a exercise company and app. Yeah, they make exercise equipment. Right. That has not historically been a great business to be in. Yeah, I mean, they're going to make their money on their, on the subscriptions and really not the hardware, the actual bike. Right. Focus on, on value investing. This is important because especially as a Maybe as you're getting prepared for retirement or in revire or, or in retirement. Value investing is very important because we're looking for companies that are undervalued with strong fundamentals. And this is the hardest part of the game. You have to know what you're looking at. The two things that come into mind immediately are, look for historical PE ratios of every firm of every company that you're looking at. Hey, where is this thing traded on a PE ratio over the last five years? Is it higher or lower than it has? What caused it to be higher? What caused it to be lower? So, like, there's fundamental analysis that you have to drive into to figure out, like, hey, is this PE ratio just low or is it low for a reason? And then also we, you know, we've talked about this in our educational classes. What about like, book value per share, right? Like, hey, if this company went out of business and they liquidated everything, the chairs, the equipment, the, you know, the TV's on the wall, whatever the assets they may own, will there be money to pay the actual stockholder? Right, because the bonds get paid out first. And then the stockholders, like, another way be like, hey, you know, like, if they go out of business, I'm actually going to make money because they actually have things to sell. They, they don't have a lot of debt. But something, something else happened, right? So, and then avoid market timing. God, no one gets that right. Talked to an advisor the other day and couldn't talk one of their clients off the, off the ledge. And right before, you know, as the market was down 10%, they're like, get me out. And what happened? Two, three, four business days later, it went up 10%. Right. Obviously we gave half of it back the next day, but we still, we're still up probably a net 5% from that, from that moment. And you can't miss that. You can't miss that delta. You can't miss that net positive return. Yep. So the market timing thing is, is the one, you know, you really have to drive home. You know, there's some, some things, you know, you'll never forget. You know, I had one of those, those clients back in Covid, you know, and basically, and you know, when you look back at it now, it really was not that long of a period of time with when the market was down, but it was such, such an unknown and no, no one knew what was going on. And everyone was getting, you know, locked in their home. You know, I had one, I had one guy just like that he said, you know, Derek, thank you for everything that you've done for me, but I cannot handle this anymore. You know, I'm gonna, I'm gonna go to cash and I'm gonna, you know, go. Go on my own. What happened? The government printed trillions of dollars and the market rejoiced and sayonara from there. Man is gone. You know, he would have recovered. Everything he lost within two, three weeks. Of when that happened, we recovered within about 40 days. And, you know, I, you know, obviously had. That was, you know, many conversations in, you know, I telling them basically everything we're talking about right now. So, so yes, you know, have a plan, you know, stick to the plan. And, and like we've been saying, you know, analyze what's going on there. You know, it's. Is, is it a long term systemic problem or is it headlines that, that are, you know, manipulating. Not manipulating the markets, the wrong word. But, you know, is it, is it, you know, probably short term pain based on, on headlines that can, that can be corrected? You know, if it's a long term, long term sustained down, downturn, then yeah, maybe we need to take a look at the overall mix. But, you know, this is investing today. There's going to be highs, there's going to be lows. The market is not going to go straight up. The market is not going to go up 20% every year. You know, you have to be, you have to stick to your plan and you have to be willing to ride the volatility because it's always going to be there. You know, it was, it was there with the last administration. It's going to be there with this administration. I have a lot of, not a lot, but I have a couple of clients saying, oh my God, Tony, I'm about to retire. And like, this market's down 8%. And I'm like, you're not down 8%. And you were up the last two years. Like, it overshot what we actually, you know, how we built our plans is we build in conservative investment models. And you overshot those last two years. Like, you're still fine. You're actually better than what we predicted by, by design. Right. So again, be having, you know, true planning software helping navigate some of these decisions that are just sometimes you can't quantify them in your head. It's just too, sometimes maybe too complex. Yep. So. All right, man. Well, I hope this was helpful for a lot of people. Spent a lot of time on this, hit a lot of different topics, but it's basically have a game plan. And the game plan is just not like, hey, I'm going to invest and stay invested. Like, it's a lot with a lot more layers to it. Yep, for sure. So. So yeah, thanks. Thanks everyone for listening this week. You know, keep those show ideas coming. InfoWPConnect.com is the best way to get a hold of us and we'll talk to you next week. The opinions expressed and this podcast are for general information purposes only and are not intended to provide specific advice or recommendations for any investments, legal, financial, or even tax strategies. It is only intended to provide education about the financial industry, so please consult a qualified professional about your individual needs.