Staying in the Middle: Responding When Markets Go Against You

I remember being around a sell-side analyst many years ago at a conference dinner. One of his companies just missed earnings and was down 8% on the day. In my mind, no big deal. Companies miss earnings all the time. And I’ve seen way worse than down 8%. But damn, you would have thought the world for him was ending that day. Absolutely distraught that he didn’t see it coming. Maybe that stock was his best idea. Maybe he just put a bunch of clients in the name. I don’t know. But things going against you in investing happen all the time. Internalizing and personalizing losses will destroy your sanity.

Not everything works out. Not everything goes up. You do this long enough and you’ll have plenty of mistakes.

This doesn’t mean you need to like losing money. This doesn’t mean you celebrate losses. But it does mean accepting that investments going against you are part of investing.

Take a lesson from basketball star Chris Bosh, who has some useful advice in his book, Letters to a Young Athlete:

When I first got into the league, it was tough handling losing. Wins were few and far in between. There was something the teammate told me, that always stuck with me: “don't get too high, don't get too low. Stay in the middle.”

Playing so many games in the league, you have to learn to continue your life, both on and off the court, regardless of any game’s outcome. You have to handle both losing and winning. You have to keep them from bringing you too far down or pumping you up too much. So what if you blew a 15 point lead on your homecourt with seven minutes left? It's embarrassing, sure. But you better get over it, because you'll be out there again in a day or two.

A major win and a major loss. You know what I did after both those things? I did this thing the true pros do after any game regardless of the outcome: I got back to work. I watched film. I asked for feedback from my coaches. I turned my mind toward the next game, even if the next game was in a new season, or at a new level of the sport…

When you are around great investors, you’d never know if their portfolio was up or down on the day. As Bosh said, “They stay in the middle.” They accept losses are part of the game. But whether you win or lose on any given day, you always get back to your process.

This idea is not new. It’s been around for thousands of years. Stoic philosopher Epictetus, in The Art of Living, provides perspective from two millennia ago:

What really frightens and dismays us is not external events themselves, but the way in which we think about them. It is not things that disturb us, but our interpretation of their significance.

There are events and there are our reactions to those events. Those are two distinct things. We think they are the same, but they are not.

How we react to adversity is up to us. It’s not predetermined that losses and volatility are stressful. YOU create the reaction. YOU create the stress. Your reaction is your choice. If you want to ruminate and throw things and complain about how it’s all so unfair, that’s your call. But remember, it won’t make the investment go back up, it won’t improve your well-being, and it’s a waste of time.

If you’re a CIO, normalize the idea that your team will have problems in the portfolio. Never desired, but normal. Don’t pretend as if you could have made them go away by only working harder or being more diligent. This isn’t a problem you can outwork or resolve to do better.

As legendary UCLA Basketball coach John Wooden states in the book, The Essential Wooden:

Mistakes are part of winning – not dumb mistakes or those caused by haste or sloppiness but mistakes made by intelligent and thoughtful individuals attempting to make something happen.

Sure, take a look at the investment and see if you missed anything. Listen to the earnings call. Review the thesis. Read the financials. But get back to work and your investment process. Don’t sit there ruminating how awful it is.

Thinking you won’t have investment mistakes is like asking Chris Bosh not to lose a game an entire season. Or asking an MLB to go 162-0. It’s nonsense when framed in athletics. But investors think this reality doesn’t apply to them.

I’ll finish with more Stoic wisdom, this time from Marcus Aurelius’ Meditations:

Remember: you shouldn’t be surprised that a fig tree produces figs, nor the world what it produces. The good doctor isn’t surprised when his patients have fevers, or a helmsman when the wind blows against him.

Likewise, don’t be surprised when markets go against you. It’s an inescapable part of investing.