In the Heat of the Moment
Emotions don't care about your logic.
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I recently did the math, and I've been on ~44 flights since August 24th, 2021. Some of these flights were 10 hour overnight hauls from Atlanta to Europe and South America, others were $15 discount Ryanair flights around Europe, and a few were the dreaded Spirit Airlines flights to and from Vegas. On average, I was on a plane once every 10 days.
44 flights is a lot of time in the air, so you would probably think that I like flying. The truth is, I really, really don't like flying. The whole experience just sucks. Security lines take forever, you have no space in the main cabin, and tarmac delays have grown more and more common. But the worst part of flying?
You're stuck in a metal tube with no way out until you land.
But it's not just being stuck in a metal tube, it's being stuck in a metal tube 36,000 feet above the Earth's surface that really gets to me, because sometimes when you're 36,000 feet above the Earth's surface, you experience the world's worst sensation: turbulence.
You're reading a book, or listening to music, or taking a nap, when suddenly your stomach drops as the plane is lurched downward. The pilot calls for all passengers and crew to buckle up, as the next 30 minutes are going to be bumpy. And it's the longest 30 minutes of your life while the plane is pulled in every direction.
Of course you land safely. But landing safely doesn't resolve the fear and anxiety you felt.
A fear of flying is illogical. Planes, especially commercial flights in the western world, are the safest mode of transportation available. Turbulence has never caused a plane crash, and the odds of dying in a plane crash are about 1/11 million.
For comparison, the odds of dying in a car crash are 1/5000.
I know planes are safe. I know turbulence isn't a risk. I know that I'll reach my destination safely.
But you know what? When you're 36,000 feet above the Earth's surface and the weather forecast on your flight from Sevilla, Spain to Manchester, England is a column of red for the duration of your flight, you don't care about science, logic, or rational behavior.
(Yes, my flight path was basically the red and orange. When the pilot announces before the flight that "strong headwinds caused by the storm" will add 45 minutes to your two hour and 30 minute flight, you know you're going to have a bad time.)
When you're 36,000 feet above the earth's surface, and you have to spend two more hours being tossed around by Neptune himself, you aren't thinking about how microscopic the odds of a crash are, and you aren't thinking about the fact that Ryanair has a flawless safety record with zero fatal accidents.
You are thinking that every bump, every drop, and every foreign noise spells your imminent doom.
It's easy to be logical and rational from the ground. But once you're in the air? Once that turbulence hits at 36,000 feet? Rationality is replaced by fear and anxiety.
"Why do investors do dumb stuff?"
It's a great question, considering a lot of really dumb stuff happened last year. Why did people buy bitcoin at $60,000 or pay 50x sales for tech stocks or buy NFTs?
Why didn't retail investors just invest in market ETFs and go live their lives?
After all, the market averages 9% returns from year-to-year, and it is extremely difficult to outperform the market over the long-run (Shoutout to every piece of personal finance advice ever).
Because when you're in the arena, when you're actively trading every day, you aren't worried about "long-term averages". You are worried about what's going on right now, every single day.
When you make a lot of money by investing in different cryptocurrencies, you are inclined to believe that you will make more money from investing in cryptocurrencies. The same is true with any market segment: SPACs, tech stocks, NFTs, whatever. If you made money, you must have done something right, right? Of course you're going to double down.
Or maybe you didn't make any money in the market, but your friend did. And he's been bragging about his "trading" for weeks. Of course you're going to feel FOMO. Of course you're going to want to get involved.
And that's how bubbles happen. Someone gets rich buying a thing, so they double down expecting to get even richer. Meanwhile, someone who has never touched that particular asset but feels FOMO from seeing their friends get rich feels compelled to invest as well.
Yeah, yeah, active investing is risky and outperformance is far from guaranteed. It's easy to be logical from the outside. But when you're making that money? You think you are the outlier. You made that money, after all. You're certainly a genius. Might as well keep going.
Investing, as a concept, is easy. But real life isn't conceptual. It isn't a simulation. It isn't lived from an outside-in 40 year perspective. Real life is emotional and chaotic. Real life has years of +30% returns and weeks of -10% returns. Real life is where your investments have to pay for your house or your kid's college. Real life is when you may have to push back your retirement by three years if the bear market lasts too long. Real life is when a grand slam in the market could accelerate your retirement by five years.
Real life isn't a line on a chart; it's the near-infinite data points that affect the line on a chart.
You can teach someone statistics. You can teach them that the market goes up over time. But you know what you can't teach them?
How euphoric you feel after hitting a massive payday on the market. How terrible you feel when you get wrecked by a poor stock pick. How intelligent you feel when your stocks are up 30% on the year, and how terrified you feel when a bear market drags your portfolio down 30%.
Emotions can't be taught, they can only be experienced. And that's why this investing game is so hard. When you're in the heat of the moment, rationality goes out the window.
You feel like a genius after a streak of hot stock picks, so you grow more confident. You know outperformance isn't common, but you think, "What if I'm the one to beat the market consistently?" So you ignore 100 years of history and go all in on your next investment.
You feel terrified with the market down 30%, because you might have to delay your retirement if stocks don't recover soon. Sure, the risk-adjusted returns are better from this point than they were a few months ago. Sure, this is probably when you should be buying more stocks because everything is on a discount from a few months ago.
But what if this time is actually different? What if the market doesn't recover? So you panic and sell your portfolio, because you can't tolerate another 1% drop.
Investing is easy in theory: buy index funds and chill. But reality isn't theory, and emotions don't care about your logic. That's why investing is so hard: we all know what to do, but the gap between knowing what you should do and actually doing what you should do grows wider as more and more money is involved.
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