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Doubt: Your Enemy and Your Friend when Investing
Tough to Strike a Balance between Conviction and Skepticism
Owning properties has many merits. Aside from potentially making leveraged returns on your equity – assuming capital appreciation – its tangible form, coupled with the absence of up-to-the-minute price fluctuations, give owners a great sense of inner security. In current markets, equity investors (especially those owning high-growth companies) may be wishing they had more immovable assets than stocks, which can be torturous to monitor as prices make dramatic dives. There is no respite amidst bearishness.
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Price Fluctuations can Plant Doubts
“CNBC: Facebook stock plummets 26% in its biggest one-day drop ever”
(February 3, 2022)
Facebook is a company that most investors are familiar with, and for years, it has been hailed as one of the most innovative technology leaders, making brilliant acquisitions (WhatsApp, Instagram) and being led by a young founder-CEO, Mark Zuckerberg. Competition for users have come and gone; many still believe that Facebook can continue thriving for years to come.
Until that 26% share price drop.
Suddenly, sentiment turned. Doubts over Facebook’s metaverse pivot became louder. Apple making changes to its privacy policies became more of an existential crisis than before. TikTok’s rising popularity was no longer just a distraction but a direct threat to user base.
How investors process threats is dependent on the degree of inherent skepticism they possess. Across the spectrum of conviction versus doubt, we have two extremes: head in the sand, die-hard believers, and the totally fearful capitulators. I lean closer to the former camp, which can either give me diamond hands holding unappreciated gems, or stubborn paws left holding bags. Some investors will bolt out of the door at first signs of trouble, and that would have served them well with names like Peloton and Fastly.
Safety in Numbers
For investors who have a natural tendency to doubt everything, it can be a gift as well as a curse. They tend to be more anxious, looking for bear cases even if there may not be any too significant. Doubters gravitate towards more secure asset classes, though the definition of what is constitutes security varies; subjectivity comes into play here. Some may view American dollars as the steadiest form of asset. Others will think gold to be most dependable; after all, wars have been waged over this prized metal since time immemorial. Or they may put all their money in real estate – it is the largest asset class in the world, and they also do not have their prices updated every second on any exchanges. Safety in numbers confers a deep sense of security.
When the degree of doubt is healthy, not all risks are avoided. Such investors use their high mental acuity to assess upside as well as downside scenarios. They are hyper-vigilant and thorough, but not paranoid. Skepticism in the right dose can be a powerful tool in personal investing, preventing one from getting swept up in a bull market. At the same time, they do not focus too much on what can go wrong, since extreme cautiousness can lead to premature selling of generational winners. Neither are they afraid to feel unsupported by other market participants, if their viewpoints are unique.
Faith and Savvy - Tough Mix
Personal investing requires a fundamental belief that the future will be better. That portfolio valuation, no matter the asset composition, will at least outpace inflation and grow in the long run to create a safety net on retirement. If an apocalyptic future awaits, then everyone should just live in the present and forget about delayed gratification. And investors who focus too much on downside risks may end up hoarding cash, leading to erosion of wealth by inflation.
Investors need both faith and savviness, but striking the right balance is hard, especially when our natural personalities skew us more towards one than the other. It is important to be aware of our true nature, and lean more in the other direction to become better investors. I am someone who is more comfortable with his own convictions, so I try doubly hard to look for downside cases and alternative viewpoints. For skeptics, they should look up at the blue skies more.
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