How to avoid ‘woulda, coulda, shoulda’ regrets
KNOW WHEN TO HOLD THEM AND KNOW WHEN TO FOLD THEM, EVEN WHEN YOU FEAR LOSING IT ALL
One of the key differentiators bet ween humans and other animals is the ability to engage in critical thought. While a lot of energy is consumed in being critical of others’ behaviour and decisions, occasionally we rise above the sophomoric and turn the light on ourselves, considering our own actions and decisions, and how we might have done better over time.
And so it is, in the arena of investing, that all of us who have taken the time to think about all of the investments we made — and those we didn’t make — have a sizable “woulda coulda shoulda” file that grows with each passing year.
I have always said that I would rather regret the investments I didn’t make rather than those I did, because there is a real difference, at least viscerally, between losing an opportunity to make money and actually losing money (although I am aware that they are the same from a mathematical point of view).
And still, I find myself spending a lot of time thinki ng about i nvestments I didn’t make that, in hindsight, seem like such obvious wins with so little downside.
I’m not referring to buying Facebook or Google or Apple when they were trading at a fraction of their current market price, since I believe that the market ( especially in large- cap stocks) is relatively efficient and the price of any widely traded stock more or less represents its value at any point in time.
Instead, I’m referring to big, fat, macro trades.
How could I not have bought the S&P 500 index at below 700 in March 2009? How could I not have gone all- in on buying USD when CAD was trading well above par in 2013? How could I not have shorted oil at US$ 120 per barrel in 2015? And how could I not have bought it all back in January of this year when oil was at US$ 26 per barrel?
At l east in retrospect, these trades didn’t require any supernatural abilities to put together. They did, however, require three key elements, all of which are often absent from nearly all so-called experts right when they are most needed.
The first required element is the ability to apply fundamental analysis to your winning trades in real time, even as they play out exactly as you imagined. Sometimes even the best of investors are able to convince themselves that they are somehow more clairvoyant than the rest of us in the same way that a fly on an airplane believes that it is flying over 1,000 kilometres per hour.
Instead, winning trades (whether they involve going long or short) require even more discipline than others in order to know when to exit them, since the mere inertia of the trade can blind us to the fact that it can be over.
The second required element is more behaviour- related but equally as real: the ability to swim upstream precisely at the point where the opposing current is at its peak. It’s one thing to apply fundamental analysis to a trade and determine that the bulk of profits have probably already been made, making the asymmetry of the possible outcomes work against you whereas t hey once worked in your favour. It’s another thing altogether to act on that calculus and get out of a trade when the rest of the investing world is still screaming “Buy! Buy! Buy!” or “Sell! Sell! Sell!”.
Ironically, this element is even more important when we are near or past the bottom of a bear market, since fear can be a more powerful force than greed, keeping even the most savvy and dispassionate of investors on the sidelines, holed up in their bunkers.
The third required element is liquidity — the availability of “dry powder” to use when cash is required most. If you find yourself fully invested — without even the availability of borrowed capital — at that precious time where your analysis and conviction lead to preparedness to take action, the pre-existence of the first and second elements will be all for naught.
It is for this reason that most professional investors have “liquidity buckets” — parts of their portfolios that are held in cash, nearcash, other very liquid instruments, or in the form of pre- approved credit at a pre-determined price. There is nothing worse than reaching back to your quiver after careful calculation only to find that you have no arrows.
The existence of these three elements in no way guarantees success — we are human and are prone to making mistakes. Rather, it is safe to say that, in the absence of one or more of these elements, success will elude you, as you watch macro forces deliver opportunities to those with the ability to focus, the strength to go against the crowd and the firepower to take decisive action when it is needed most.