The Stoic Investor
How you handle bumps in the road will determine your success in investing and life
I recently discovered the philosophy of Stoicism.
What is Stoicism?
Stoicism is a philosophy that was discovered in Greece in 300 BC. Its beliefs boil down to this: the only thing we control in this life is our thoughts. Everything else is out of our control: our health, when we die, how people think of us, what events occur in our life. Much of this is left to fate. What we can control, in the chaos of it all, is our thoughts and perceptions. Have good thoughts and perceptions of events, and you will have a good life. Have bad thoughts and perceptions, and you will have a bad life.
Stoicism focuses on controlling what you can control: your thoughts and behaviour. And disregarding what you can’t control. So you can live a harmonious life.
I’ve come to the realization that the philosophy of Stoicism applies to investing as well. Whether you’re successful as an investor comes down to how you react to events—your perceptions. If you perceive events correctly, and react to them appropriately, you will make good judgements and decisions. If you don’t, you will make bad judgements and decisions.
Sense
When Covid first hit the stock market sold off by close to 35 percent in a month. Was it justified? This is where perception comes into play. Did it make sense? Were people just making knee-jerk reactions?
During the Financial Crisis in 2008-09 when stocks sold off by 50 percent was this justified, or again, was it people overreacting? This is where your perception and control of your emotions is so important in investing.
The same can be said of almost any financial crisis going back in history.
Same goes for bubbles—when prices got out of hand.
Stopping and asking yourself if it makes sense is of critical importance.
Is it justified? Is it rational? Or is it just emotions getting the most of us?
Emotions
Stoicism is all about handling your emotions appropriately. The philosophy of Stoicism (with a big S) shouldn’t be confused with the word stoicism (with a small s), which represents being devoid of emotion. The philosophy of Stoicism recognizes that humans are emotional and seeks to appropriately direct those emotions in a healthy way.
The same is essential in investing.
Investing is an emotional rollercoaster. The highs. The lows.
In order to be successful at investing, you have to handle your emotions. It is the most critical element.
The examples I gave of major selloffs in the stock market were of the overall stock market. If you’re investing in individual stocks, it’s even worse. You have to deal with even more volatility, and questioning whether volatility in business results is temporary or permanent. In other words, controlling your emotions, perception and thoughts is even more important.
Have good thoughts that are rational, and you will make good decisions.
Have bad thoughts that are irrational, and you will make bad decisions.
Success
Success in investing and life ultimately comes down to how rational you are with your thoughts, and the soundness of the decisions you make.
This is the uncanny parallel between Stoicism and investing.
I actually discovered Stoicism through another famed investor, Bill Miller. Miller is one of the most successful investors ever. During an interview he mentioned how he turned to Stoicism during the Financial Crisis in 2008-09 when the value of his investment fund was down well over 50 percent. He, like many people, at the time was feeling emotionally strained. Stoicism helped him get through it and thrive.
As an investor, you will handle many bumps in the road, and you better be prepared for them. I virtually guarantee at some point in your life there will be a major sell-off in the stock market that will see the value of your stocks decline by nearly 50 percent, or more. How you handle this is of critical importance.
Like Stoicism which helps to deal with bumps in the road in life—health problems, death, adversity etc.—having the right mental approach and preparation helps to deal with landmines as an investor.
A sure way to get through bad times is proper preparation for them.
If you’re unprepared, your world is going to get rocked.
Like if you’re unprepared for adversity in life.
Life is beautiful, but it’s filled with potholes.
Anyone who expects otherwise is delusional and is in for trouble.
How you navigate these potholes is of critical importance.
Good Company
Some practicing Stoics, which you may find interesting are comedian Jerry Seinfeld and golfer Rory McIlroy. Both recently read the book Meditations by Marcus Aurelius, one of the most famous Stoics in history, who was Roman Emperor from 161 to 180 AD, a beloved and peaceful emperor who suffered much hardship throughout his life, which Stoicism helped him through.
As well, U.S. vice admiral James Stockdale, who was a prisoner of war for almost 8 years in Vietnam, practiced Stoicism and used it to help him get through his captivity.
Other successful investors, whether they realize it or not, take a Stoic approach. They handle volatility in financial markets with equanimity. They focus on what they can control. And they disregard the rest. It’s how they’re able to survive the chaos. Warren Buffett and Charlie Munger’s investment approach and views on life are pure Stoicism.
The parallels are interesting.
Picture Perfect
I got this picture when I was younger, and it now hangs on my son's wall:
I love basketball, and when I was younger loved the discipline of practicing to get better at it. I used to think the message in the picture was a bit extreme. But I’ve come to realize that it is exactly what Stoicism teaches: your thoughts ultimately control your destiny. In life and in investing.
You aren’t what you say, or even what you do.
You are what you think.
The quality of your thoughts. The healthiness of your thoughts. Your perceptions.
Your perceptions will drive the quality of your decisions.
In investing and life.
Bottom Line
Watch your thoughts, they become your destiny.
Your perceptions and how you handle bumps in the road will dictate your outcomes.
Perception is everything, and this most certainly applies to investing.