Dealing with a big loser (business brew appearance / companion post)

I went on my friend Bill Brewster’s the business brew pod to talk about the aftermath of the spirit loss (and, surprisingly, a lot about Sustainable Aviation Fuel).

I’ll be honest: I have not relistened to the pod, but after Bill and I hung up I had two thoughts:

1. I feel like I was a little manic during the pod

   1. I can always be pretty excitable, but (as I’ve said a few times on the blog) I tore my pec last month and have a ~3 month old kid. Mix that combo with an awful month of NYC weather in January, and I basically haven’t left the apartment in a month, so I may have just been bouncing off the walls to chat with someone!

2. I don’t think I focused on the things I wanted to focus on when discussing having a big loser (perhaps in large part due to #1).

So I wanted to publish a companion piece to go with the podcast in case it helps someone else when they have a big loser.

I’ve mentioned this before on the blog, but investing is a very psychological game. If you’re going to outperform, when you have a really good / differentiated idea, you need to swing and swing hard. If you think about something like Buffett’s punch card rule, what he’s basically saying is that good ideas are rare but when you have one you have to be aggressive about it.

What’s really difficult about having a big loser (aside from the portfolio hit / losing a bunch of money) is it really shakes your confidence. In order to swing hard at a pitch, you need to have confidence in yourself. Confidence that your analysis is right. Confidence that you can beat the market. Confidence that you’re not just some monkey throwing darts at a bunch of tickers on the wall.

Having a big loser shakes that confidence. It’s really hard to take big swings at things when you’re doubting yourself. When I’ve had losers in the past, my natural inclination is to “baton down the hatches.” It’s to swing less hard. Run with more cash. Protect myself from myself.

But the reverse can be true too! In poker, “going on tilt” is a really well known phenom players need to watch out for. Basically, going on tilt is playing way to aggressive after a run of bad luck. The same can be very true in investing: when you take a big loser, it’s easy to run on tilt and swing way too hard at the next opportunity to make it all back.

Those two concepts are so diametrically opposed…. but the fear of both really messes with my head. With every investment I look at, I need to ask myself “am i on tilt? Am I just trying to swing at this because I suffered a loser?” And, if I don’t want to swing at it, I need to ask myself, “Am I just scared to swing because I took a big loser? Am I being overly conservative?"

Investing is a very mental / psychological game…. and those two opposing concepts (“am I on tilt” versus “am I being too conservative”) pulling at your mind can really mess you up (And I’ve been using the royal “you” here, but I obviously mainly mean “me”).

It’s mentally exhausting.

I try to do two things to deal with that conflict: first, I go back and look at all of the decisions I made in the loser. I’m trying to see if there’s something I missed, some way to improve my process, if this was a good process with an unlucky outcome or something else. I talked about that a lot in my prior post on the Spirit loss so I won’t relive it here.

The second thing I do is I try to re-underwrite my entire portfolio, which involves four steps.

1. I put down my portfolio weighting for all of my positions (i.e. I have a 5% position in Stock Y, 10% in stock X, etc). I do this reasonably frequently, but it’s the start of the process!

2. I write down my thesis for every position I have (here’s why I’m long, here’s my divergent view on the stock, here’s how confident I am, here’s the bigst risks and how much downside I think there is in the stock, etc.) As I’m writing that down, I try to look at the position sizing and ask myself “Why does this stock deserve to be a 5% position? Why can’t it be 10%? If I’m not willing to take it to 10%, should I just sell it all and deploy the proceeds into stuff I like more or hold cash?”

3. For each stock in my portfolio, I call my smartest friends who I know follow the company. I tell them I’m re-underwriting the company, and I just try to have a discussion with them about the stock. How are they looking at it these days? Are there any risks they’re seeing in the company that I’m not? How are they sized in the stock? Why? If it’s a 5% position for them, why isn’t it a 10% position? Why not 20%? What risks are keeping them from sizing it up? Or, conversely, why isn’t it smaller? Is this a position that’s really going to generate alpha? Why swing at this particular pitch? We (the person I’m talking to and myself) are both long the stock, so we’re generally seeing the same thing…. why is the market missing that thing? Do we really have a differentiated view?

4. Finally, I take all that knowledge and (again) look at the sizing. Often, on the heels of this exercise, there will be one or two positions I want to sell down or reduce, and one or two that the I want to build up. I’ll think about any tax consequences for doing so, and then make changes if I think it’s an after tax improvement on the portfolio.

Nothing in this process is wildly out of the ordinary in the day of a life of an investor (except for perhaps number three; calling all of your friends who follow your stocks and asking for updates in the same week is a little different), so why do I do it / highlight it.

To me, it’s about getting in a clear mental headspace. I’m checking to make sure I’m thinking about things correctly. I don’t want to suddenly decide to take company X up from a 5% to a 15% position because I’m on tilt…. but I also don’t want to keep company Y at a 5% position just because that’s where I decided to size it a few months ago when maybe the story has gotten better and I’m just scared to do anything right now. Going back through my theses and checking my position sizing / thought process against others helps me know what risks I’m underwriting and get a little more confidence that I’m not being insane.

Having a big loser is rough. Everyone’s the hero of their own story; no one thinks they’re going to take a loss on a big bet. But it does happen, and when it does it can really mess with you. To me, one of the keys is to acknowledge that you’re a little messed up by the process and work through it (while also maintaining proper risk tolerance on both the up and the downside).

That’s what I wanted to say on Bill’s pod (but was a little too manic to get to it).

I hope that you never suffer a big loser…. but, if and when you do, I hope this post helps you figure out a method to process it.

PS- one other thing that’s important. It is really easy to let a big loser effect your home life. Right after the Spirit loss came out my wife asked me something and my first instinct was to yell at her. And I wanted to yell at a bunch of people about the position or just rage at them. Remember: you’re an adult, you made a bet and it came up poorly. Take a deep breath and don’t yell or rage at anyone. Just process it and move on (or at least that’s what I tell myself and try to do).