I was at my hometown recently and chanced upon a friend who works as an investment banker in Delhi. We had met almost after 15 years, and so I could notice a big contrast in his looks as compared to what it was in the early 2000s. He looked much older than his age, around 39, and so I enquired about his health.
To my utter shock, he said, “I had an angioplasty late last year, where they put a tiny tube in my blood vessel to restore blood flow through my arteries.”
In short, he meant, “I just survived a heart attack.”
“Stress is part of my job profile, you see,” he shrugged it off jokingly.
I had earlier read of a 35-year-old London-based hedge fund trader who died of a heart attack in 2013, and of the head of JP Morgan’s equity sales, aged 37, who had also died of heart failure in 2012. But my friend was, well, my friend, and thus the gravity of the situation weighed heavier this time.
“Is it worth it?” I asked my friend.
“What?” he asked.
“The stress that you say is part of your job profile?”
“Is there any other way you know of?” he asked me.
I couldn’t have asked him to quit his high-paying job. That’s not a real solution for most people anyways. They have mouths to feed, EMIs to take care of, and financial goals to meet. Over that, quitting a job and starting out on your own doesn’t guarantee a road paved with gold. You may try to get over your ‘addiction’ to the monthly paycheque (that’s what Nassim Taleb calls it), but going on your own doesn’t guarantee a paycheque anyways.
“Where is this chase leading us to?” I have asked myself repeatedly while pondering on my friend’s question about the alternatives, which I couldn’t reply to that day.
By the way, it is not just my friend whom I know who seems to have a messed-up life given the demands of his highly stressful job. I have seen scores of stock traders, investors, analysts, and fund managers – apart from managers, bankers, accountants, and others working in the corporate world – over the years who have “out-shaped” themselves, thanks to the stress they have allowed into their lives – stress that often leads us to poor choices, like sedentary lifestyle, bad food, alcohol, smoking, etc.
You’ve heard of Peter Lynch, right? Apart from authoring two wonderful books (Beating the Street and One Up on Wall Street), Lynch is known as one of the best fund managers of all time.
In 1977, he was named the head of the then-obscure Magellan Fund at Fidelity which had US$ 18 million in assets. Thirteen years later, in 1990, Lynch resigned from his job but not after his fund had grown to more than US$ 14 billion in assets. From 1977 until 1990, the Magellan fund averaged a 29% annual return and as of 2003 had the best 20-year return of any mutual fund ever.
Lynch was just 46-years old when he retired from his top job, and at the peak of his game. He may have calculated it that way because his father had died of cancer at this very age of 46.
When asked for the reason for his quitting by Barron’s in 1990, Lynch replied –
I am just missing so much of it. I went to a soccer game with one of my daughters and I think they lost seven-to-nothing, and I had a great time. I went to one soccer game; I missed seven. I will tell you how bad things are. I used to read a book every two weeks. I haven’t read a book in the last 18 months.
“…a world class workaholic,” Barron’s wrote of Lynch, “he wryly confessed that he found himself setting new records for long hours in recent years, especially the last 18 months. And, in the process, he cheated himself of the pleasures of hearth and home.”
Talking specifically about stress when it comes to a highly random place like the stock market, I recently read this passage from Nassim Taleb’s Fooled by Randomness that tells something about why we must avoid it (the stress) –
…people who look too closely at randomness burn out, their emotions drained by the series of pangs they experience. Regardless of what people claim, a negative pang is not offset by a positive one (some psychologists estimate the negative effect for an average loss to be up to 2.5 the magnitude of a positive one); it will lead to an emotional deficit.
…people in lab coats have examined some scary properties of this type of negative pangs on the neural system (the usual expected effect: high blood pressure; the less expected: chronic stress leads to memory loss, lessening of brain plasticity, and brain damage). To my knowledge, there are no studies investigating the exact properties of trader’s burnout, but a daily exposure to such high degrees of randomness without much control will have physiological effects on humans (nobody studied the effect of such exposure on the risk of cancer).
…wealth does not count so much into one’s well-being as the route one uses to get to it.
Constant fixation on the randomness of the stock market is what burns most people out, says Taleb.
- Checking stock prices minute by minute (or even daily),
- trading in and out of stocks believing you can beat the market and everyone around you,
- leveraging to buy stocks especially when you have done well recently (thanks again to randomness), and
- dealing in derivatives that engulf you in greater randomness
…are all ways you can add tremendous stress to your life.
Not to forget the act of buying poor quality businesses and the act of shorting stocks that also act as culprits in creating the stress situation.
And then there’s the biggest offender of all – the envy of seeing others getting richer faster. Oh, nothing beats this one in taking our emotions to the cleaners! It is indeed the quickest route to self-sabotage.
Prof. Sanjay Bakshi wrote a brilliant article in 2012 titled Returns Per Unit of Stress, where he advised –
…stress should figure in one’s investment strategy, much more than it does, perhaps, even more than financial risk, because stress is a killer and high-stress situations – whether they carry high or low investment risk – will always carry a high risk to one’s health. In fact, one can now measure how many years of one’s life is cut short by being exposed to a high-stress life.
Being in the market for fifteen years, there have been multiple instances where I have sensed how emotionally vulnerable a lot of traders and investors are, especially when they have not been through a bad period themselves.
People must understand that the stock market is a giant minefield of cognitive biases and emotional weirdness. As Taleb writes, you can think of the market as a random walk with an upward bias. Year on year, you’re generally up. But day by day, you can be down nearly as often as up. Because of loss aversion, you’ll feel the losses more strongly than the gains. Looking at your stocks every day will at least add to your stress levels, and maybe your decisions will get thrown off.
Stress is a killer. No doubt about it. And if you are not dead yet thanks to it (you are reading this alive, right?), you have a good probability of getting into health problems, unhappiness, depression, relationship problems, and more.
Now, I don’t believe that a stress-free life is possible. Stress is a response to challenges in life, and a life without challenges is too boring to contemplate. In fact, bringing in another of Taleb’s mantras, you need some stress to make yourself antifragile.
However, I do believe that most of the stress in our lives, and especially in our investing lives, is unnecessary. And that it can be eliminated by taking some simple (and some not-so-simple) steps.
It can’t be accomplished overnight — I’ve been eliminating stressors in my life for a while now, and I’m still not done. But I think it’s a worthwhile goal.
Here are a few things you can ensure in your investment process that can help you minimize/avoid stress. What follows below is what I practice in my own life and would advise my best friend, and thus can vouch for their effectiveness –
Removing Stress from Investing: A 20-Point Checklist
- Check if you have the emotional bent to pick stocks. If stock prices jumping up and down trouble you a bit or if you don’t have the time and inclination to study businesses, please avoid stocks and invest through (good) mutual funds.
- If you are picking stocks, invest in businesses you understand extremely well. And please don’t buy anything you don’t understand, even if that’s a raging stock/sector or even if you are trying to clone a successful investor.
- Try to avoid stocks from industries like banking and finance, pharma, commodities, utilities, real estate, construction, airlines, textiles, etc. Also, companies that have high debt on their balance sheet. These are either difficult to understand businesses or their economics are mostly not in your favour as an investor.
- Invest in high-quality businesses (say, long term annual sales and profit growth > 15%, long term ROCE > 20%, debt to equity < 0.5x, etc.) that you can own for the long term. Also ensure that these are run by high-quality managers who have done well over time and have no history of cheating shareholders. The probability of stressing out and losing your sleep is low with such businesses.
- Never borrow to invest. Never! And invest only the amount which you don’t need in, say, the next five years. Mostly, you will not earn great returns from your stocks overnight, even if your analysis and idea are right. But when you borrow to invest, you may end up compromising on the time you may otherwise have to compound your money well.
- Diversify well (max. 15 stocks), and size your positions to the level of a peaceful night’s sleep. For instance, you may avoid situations where you are holding more than, say, 15% of your portfolio in a single stock (I use this number for myself). Have such a number in mind for yourself, and don’t exceed that. Also, instead of worrying about position sizing (how much of which stock to own), work towards equal allocation. Like, if you wish to own 15 stocks in your portfolio, every stock you buy must not be more than 6-7% of the portfolio at cost.
- Ignore relative performance of your portfolio i.e., who are you beating in this game. Focus on absolute performance. If you can earn 15-20% CAGR from your portfolio, you are doing fine. If not, let go your ego of picking your own stocks and invest through few good mutual funds.
- Completely (repeat, completely) avoid participating in Whatsapp groups where they talk stocks. Also, avoid online stock forums where you don’t know whom you are interacting with. These are deadly places and must be avoided if you wish to keep stress away from your investment life. Rather, have a group of friends whom you can talk stocks with. Meet with them to discuss ideas offline, not with a bunch of strangers online.
- Mostly avoid attending meetups and conferences where they discuss stocks. They just add to the biases you already have in your brain. Also avoid business newspapers, television channels, economic forecasts, and any other news about the stock market. You don’t need any of these. Rather, spend your time reading annual reports.
- Avoid the ticker tape. Don’t look at stock prices daily. They force us to act, and too much action equates with too much stress. Identify and own good business, and then sit on them still, doing nothing, till they remain good businesses. Prove Blaise Pascal wrong, who said, “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
- Avoid derivatives, by far. They are indeed financial weapons of mass destruction.
- Accept randomness and volatility as a core part of your investment journey. Zoom out of the daily grind of the stock market, and zoom in to the long-term economics of the businesses you own.
- Don’t look at the stock market to make you rich, but just to keep you rich. The income you earn from your work and the money you save out of it, when invested well, should make you rich. Not the stock market. Okay, if you know of someone like you who got rich through stocks in the past, know that you are looking at a rare survivor.
- If you are already working on a good job, forget quitting it to become a full-time investor. It may be a road to hell, especially when you end up depending on the market to run your household. Also, getting full-time into investing can be lonely and boring, and our brains often go into a tizzy when we are either going through these emotions of loneliness and boredom.
- If you wish to make a career in the stock market, try as much to avoid being on the sell-side (working as an analyst for a broker). Almost all of what they do is short-term oriented and highly stressful. Rather, check with a buy-side firm (especially long-term oriented money managers). Best, work outside the stock market and practice investing on your own. Also, avoid working in an investment bank. You may have to sell your soul to earn your commissions. Wait, it’s not that the people there are bad! I have a few investment banking and analyst friends after all. It’s the way they are incentivized that’s injurious to other people who take their advice. One of the factors that hastened me quitting my job in 2011 was because I hated going to Nariman Point in Mumbai where my office was located. That place – the hub of stock market analysts, investment bankers, and fund managers – I believe, contains that maximum amount of stress and ego per square feet of space in India.
- Avoid searching for new books and instead spend time reading the investment supertexts that extol the virtues of long term thinking and patience. Better, read books outside investing.
- Instead of sitting and staring at the screen, go for long walks. Exercise. Meditate. Eat well. Get enough sleep each night. Avoid the company of stressed traders and investors. Avoid online portfolio trackers.
- Recognize your limits and be reasonable with your expectations. How well do you know what you don’t know? Don’t let your ego determine what you should do. As Charlie Munger says – “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the old saying: ‘It’s the strong swimmers who drown.’”
- Avoid predictions (making and taking), and expect surprises. Jason Zweig wrote this in The Intelligent Investor – “The only thing you can be confident of while forecasting future stock returns is that you will probably turn out to be wrong. The only indisputable truth that the past teaches us is that the future will always surprise us — always! And the corollary to that law of financial history is that the markets will most brutally surprise the very people who are most certain that their views about the future are right. Staying humble about your forecasting powers, as Graham did, will keep you from risking too much on a view of the future that may well turn out to be wrong.”
- Practice the three iron rules – peace, detachment, and acceptance. Most good decisions in life are marked by these. Rising markets may lead us to ignore this. Most investors like to believe they can enjoy stock market gains without losses. And that denial is what causes them stress and conflict. They feel disappointed when the harsh reality doesn’t align with their rosy expectations. And then, such investors feel helpless, which further magnifies their disappointment and stress levels. After all, most of what happens in the stock market are outside of our control. We can’t stop the market from falling and crashing, nor can we call up companies or the stock market regulator or the central bank when our stocks tumble. Making and losing money is just the nature of investing, and often outside your control. So just do your work well, and then let it go. Yes, let it go.
The legendary Rajesh Khanna said in one of my favourite movies of all time – Anand –
बाबूमोशाय, ज़िन्दगी और मौत उपरवाले के हाथ है जहांपनाह। उसे ना तो आप बदल सकते हैं ना मैं। हम सब तो रंगमंच की कठपुतलियां हैं जिनकी डोर उपरवाले की उँगलियों में बँधी है। कब, कौन, कैसे उठेगा यह कोई नहीं बता सकता है. हा, हा, हा!
Translation – Brother, life and death is in control of the One above. We cannot change that. We are all puppets and He controls our strings. None of us can tell who will be pulled up when and how. Ha, ha, ha!
So, stress or no stress, we are still going to die. But we have a choice – to die just once or in small bits every day (due to stress).
You see, when you add unwanted stressors to your life and investing, you are like Damocles who dined with a sword dangling over his head where small stress to the string holding the sword would have killed him. Don’t be like him.
Prof. Bakshi wrote in his post –
My advice to those who ignore the stress part of the equation but focus only on returns per unit of risk: You cannot take it away with you, so what’s the point of all that stress, just for the money?
Seriously, what’s the point?
- Returns Per Unit of Stress ~ Prof. Sanjay Bakshi
- Fooled by Randomness ~ Nassim Taleb
- Is There Life After Babe Ruth? (Peter Lynch’s Interview)
- A Short Guide to Reading and Learning for Investors
- 3 Iron Rules of Life and Investing
- Why You Must Not Quit Your Job to Become a Full-Time Investor
Sir, many times we come across a new investment idea from reading business newspapers. In such case, will it be prudent to completely ignore business newspapers, as it is a great source of information for retail investors.
Abhishek Bhattacharya says
Vishal, you have done a great job, a service by the synthesis of the fundamental wisdom from the beautiful minds of Finance, value investing to be more precise. It shows your grit and determination.
Picasso once said ‘Great ARTISTS STEAL’
For this particular, writeup (introspection), my only suggestion (with enormous Humility from my end) is to try to reduce the checklist to, say 3/4 points. As you are well aware, Simplicity is but the other facet of complexity.
I have not been able to read the 20 point check list, since it reminds me of Sorting Algorithms, which, off course can be used in “VALUE INVESTING”. (just a perfunctory glance).
The fault is my alone.
In my opinion (I regret for the digression) Phil Fisher and Philosophy (both Western and Eastern Philosophy) form the bastion of Investing.
Please do grant me redemption for Hubris.
Prof Sanjay Bakshi has a Beautiful Mind. Please send my Regards to him.
Also, not to sound Narcissistic, Bringing in inter Alia Karl Popper, George Soros, Stanley Druckenmiller and Bill Ackman :::Logic and philosophy, and creating a symmetry with Buffett – Munger could be another point of (interpretation) /View.
Vishal, I wish I had your grit and determination. I frequently read your blogs, and TRY to understand them, introspect on them.