Louis' Look (09-28-2020)

When the market was getting crushed earlier in the year, I remember being glued to my phone, looking at 30-second charts of the S&P 500. Only just graduating technical analysis kindergarten, this was the first crash I'd witnessed.

I find it crucial to always reflect on your emotions. In doing this, I realized one critical mental mistake I was making - as volatility increased, I was beginning to delve into shorter timeframes in which I never found value.

In other words, my plan was being crushed and thrown out the window.

As Mike Tyson would put it, "everyone has a plan until they get punched in the mouth."

As abnormal and crazy as 2020 has seemed, the reality is that stints of volatility and unprecedented price action have been a hallmark of markets looking back over a century. The moment we disagree with this statement, it's safe to say our emotions are doing the thinking, not our heads.

The big lesson for me is to never allow swings in the market or your positions to change your plan, process, and investment goals.

While that one line summarises the entire field of Finance, it's important to recognize because too many people will get to the end of the year and completely forget the emotional pitfalls they experienced as they saw their positions get crushed. The real winners in the market are aware of how poorly our human instincts align with a financial plan.

Morgan Housel nailed this idea by mentioning that "investors as a group don't learn from booms and busts because when people say they've learned their lesson they underestimate how much of their previous mistake was caused by emotions that will return when faced with similar circumstances."

Alternatively, we shouldn't let recency bias also impact our plan. Just because stocks have been performing over the last few quarters, that is no excuse to widen your stops or adopt excessive risk, which doesn't align with your initial plan.

There's nothing worse than someone unironically claiming 'stocks only go up' only after glancing at a six-month chart of the S&P 500.

Do you have the process in place to withstand if stocks went nowhere for 16-years, as was the case between 1966-1982?

Click on the chart to enlarge view.

Being in a team where our primary job is to analyze market behavior, it's becoming more evident that those who are aware of the limitations of our human instincts, and remain faithful to a financial plan are the long-term outliers and winners in the market.

Does this subject entice the masses? Does it get clicks?

The answer to those questions is a testament to its necessity.

Thanks for reading this week's edition of Louis' Look, and I encourage you to get in touch at louis@allstarcharts.com to let me know your thoughts or any lessons you've taken on this week too.

Louis