How Stoicism Can Make You a Better Investor

“What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”  Warren Buffett

It was fall of last year that I really became interested in stoic philosophy and how it could apply to modern living.  A great introduction to stoicism is, A Guide to the Good Life: The Ancient Art of Stoic Joy by William B. Irvine.  If you have any interest in philosophy, particularly the stoic philosophers, then Irvine’s book is a great introduction.  Since that time I’ve continued to learn more about the Stoic movement of both ancient Greece and Rome as well as some more popular individual practitioners, such as Epictetus, Seneca, and Marcus Aurelius.  Today I want to offer a glimpse of how the basic teachings of stoicism can help us all become better investors.

As Buffett noted above, what is needed is a sound intellectual framework to aid us in our investment activity.  One of the reasons I adopted dividend investing as the foundation of my investment strategy is that it gives such an intellectual framework suggested by Buffett.  There are thousands of stocks out there to choose from; by narrowing the selection down to the dividend payers with acceptable yields you have reduced the total down to a more manageable list.  From here you can add other criteria  such as payout ratio, dividend growth, length of dividend payment, and debt level to name just a few.  As a new investor it was important for me to have a screen in which I could narrow the world of possibilities.  Depending on your goals you may have a very different approach to investing.  It’s not so much which approach you choose, but that you have one that is most important, otherwise you’re just drifting along allowing the enthusiasm or depression of the market to guide your attention.  It’s never a good idea to take advice from a manic-depressive like Mr. Market.  Now that we have our framework lets look at the other point Buffet brought up, controlling emotion.

Emotions are tricky creatures.  They are also stealthy and have a way of controlling our behavior without us even being aware of it.  Never forget that we were emotional beings way before we became reasoning beings.  These emotions allow us to appreciate love, companionship, beauty and a host of other feelings that make living an enjoyable experience.  However, when it comes to money/investment decisions, you would be wise to seek the counsel of reason rather than rely on the capriciousness of emotion.  How do you know when emotion is likely the one controlling your investment thoughts?  A good rule of thumb is to step back and ask yourself if you are feeling especially fearful or greedy.  If you detect either of these it’s safe to say that emotion rather than reason is calling the shots.  If you can get to the point to where you make your investment decisions based on reason you will know because reason will be indifferent to what your choice is.  It will weigh the risk vs. reward without bias, without concern for your greed or fear.  In a word, you will be emotionally detached from the decision-making process.

One of my first experiences with this was when I started investing in NYB.  If you have looked at my portfolio you will notice that NYB represents my largest position.    Although some may question the wisdom in investing in a bank these days, I did my homework and felt that NYB was a solid bank to invest in.  Here is where the practice of setting aside emotion and relying on reason comes in.  I didn’t stake my position in NYB all at once.  I actually built the position up over the course of five separate occasions.  Purchasing a stock and immediately watching its value decrease and then continuing to buy on four other occasions was hard to stomach. I doubted myself each time I bought more shares.  My fear was working overtime. I made those purchase each time NYB had hit a new low, after all this is what you’re suppose to do right, buy low?  Knowing it is what you’re suppose to do and then actually doing it are two different things.  It was an exercise in averaging down by purchasing shares at lower costs and higher yields as well as trusting my judgement.  Could I be wrong?  Of course.  That is a risk you can’t eliminate 100%, the risk that you could be wrong.

That leads me to the title of this post, how stoicism can assist us in becoming better investors.  One of the principles of stoic philosophy is that man has a purpose just as everything else has a purpose.  To a stoic, mans purpose rests in his nature and his nature is that he is a reasoning being.  Our capacity for reason separates us from the other animals, it secures a unique place amongst the other living creatures of this earth.  When we use our capacity to reason we are being true to our nature.  We have the ability to use our reason when we make investment decisions and the more we make these decisions from a place of detached reason, we put our emotion in check and take the reins from their unpredictable hands.  The more we exercise this ability the better we get and that will serve us well over time.  We can’t always make the right decision, even if we are using reason to the best of our abilities it is still possible to make the wrong decision, or a decision that was made for the right reasons, but still had a poor outcome.  If we allow our emotions to overtake us we are doomed to be at the mercy of a market that carries us on a wild ride to exhilarating peaks as well as stomach churning lows.  This is no way to carry out an investment plan and is one of the main reasons why so many investors don’t even match the average market return.  Don’t be that investor.  Use your reason to develop a plan and faithfully execute that plan irregardless of what the market does.  It’s no easy task to tune out the emotions that question our every move, but I’m convinced that doing so will reward a person for their effort.

So, have you fallen victim to fear or greed in your investing?  I would love to hear your story in the comment section.

Portfolio Update

Today I started experimenting with Google docs and decided to revamp The Stoic Investor Portfolio.  There is nothing different about the holdings, just the format I’m reporting it in.  I tried to include data that I thought would be useful to current dividend investors and those who are thinking about getting their feet wet.  So lets look at what is included and why.

  • Market Value vs. Cost basis.  This is important for one main reason; it allows you to see how market pricing changes.  These are just a few stocks out of thousands and a portfolio with different holding will look very different.  What is important to consider is not the gains or losses themselves ( although it would be important if you think there is something fundamentally wrong with the company) but how you would feel seeing these kinds of changes.  Sure, it’s nice to see MCD up close to 30% but then take a look at SFL.  It is important to know how you would feel with such fluctuations.  For me, this portfolio is being constructed with the goal of producing income.  The market value is determined by current prices and prices changes daily depending on how market participants are feeling and thus acting in terms of buying and selling.  Therefore, market noise is just a distraction that I try to tune out as much as possible.
  • Yield on Cost vs. Current Yield.  Yield on cost allows me to see what kind of income I’m actually getting off the capital I’m investing.  Current yield is income I would get if I were to purchase stocks in the company at today’s prices.  Lets use MCD as an example.  MCD is a great company, but it is pricey at the moment.  Based on the price I purchased MCD for last year my yield today is 3.6%  The current yield is 2.8%.  I may buy more MCD in the future, but it will be after a big pullback.  Current yield is always moving because it is based on price.  For a quality company that is raising dividends consistently, it may pay off to be patient and get in at a good yield.
  • Actual Dividends.  This is what it is all about.  Seeing the amounts here let us see what is actually happening.  Some of the companies I have are not dividend growers.  NYB is an example.  It has a nice yield, but it’s not growing.  I knew that going into my investment in NYB but expected it to be a steady and dependable payer.  MCD and T on the other hand have nice histories of increasing their dividends.  This approach gives me a mix of high current yield as well as a growing yield.  I think it’s important to actually see what a portfolio is doing in terms of income production. Fellow blogger DividendMantra has a great portfolio that produces income as well.  Take a look at it and see how different portfolios are constructed and how they do in terms of dividend income.

Tracking investments and using Google docs is all new to me.  I certainly don’t have all the answers and I’m continuing to learn things almost daily.  If you have any suggestions on how to better improve my use of Google docs or how I go about tracking performance, leave me a comment and let me know.  This is what makes blogging fun, the writing as well as the interaction with others who have similar interests.

Should I max my 401k?

2011 was my first year of making contributions to a 401k.  I started my current job back in August of 2010 and began contributing to get the company match since I started.  This has given me a year and a half of consistent contributions.  Before that there was one other time I contributed to this form of retirement account and that was around five years ago.  As part of a long line of consistently bad financial decisions, I cashed it out when I left the job.

For the last several months I’ve been weighing the benefits of maxing the 401k versus continuing to contribute enough to get the company match.  This has been on my mind for a while and I lean towards not maxing it out.  If you’re reading this blog there is a good chance you spend a good deal of time thinking about money management decisions so I thought I would get a second opinion from you guys.  Before you can make a suggestion it will be helpful to know why I have decided not to max it out, then you can decide if you agree with my decision or think I should reconsider.

There are two main reasons I have not maxed my 401k.  First I don’t think I will benefit (much) from the tax break.  Since this is a popular reason for supporting the decision to contribute the max if you can it seems reasonable to start with it.  By working overseas I already earn a tax exemption for income up to 92,500.00.  So there is not much benefit from maxing.  However, and I just thought of this, I do have to pay state tax.  If I do contribute the max that would reduce my taxable income, right?  Hmmm…. something to ask the accountant about.

Second, I’m not crazy about the investment options offered in this account.  It’s a target date fund through Vanguard and as such gives me exposure to indexing and dollar cost averaging through the monthly contributions with low expenses associated with the funds.  I think I may be better off investing in my taxable account and reaping the reward of capital gain and dividend income.  For this to work I need to be earning a high enough return to offset the taxable events that are recorded in my taxable account. Can I do this?  Who know’s.  I only have one year of data to refer to so making a claim one way or another is rather arbitrary.

Just to be clear, it’s not about whether the money will be invested, it’s about where.

Leave me a comment and let me know what you think.  What would you do?

A Loss of 55%!? How my worst loss became my greatest lesson

“Knowledge born from actual experience is the answer to why one profits; lack of it is why one loses”

G.M. Loeb from The Battle for Investment Survival

Back in Feb./Mar. of 2011 I made two purchases of Ship Finance International Limited (SFL) for an entry price of 19.20 and 20.36.  I was just getting my feet wet in the investment world, hell, I barely knew how to open a brokerage account!  I had also just stumbled upon the concept of dividend investing and naively thought the better the yield the sweeter the deal.  At this point in my development I had just enough knowledge to be dangerous.  I really should have spent more time studying and being an observer of market behavior.  I should have spent much more time in the due diligence process of stock analysis for the companies I was interested in and increasing my understanding of valuation methodology.  This clarity of hindsight was nowhere to be found twelve months ago, no sir, not for this new investor who had a fist full of dollars and a thirst for yield!  Silly, silly boy…

It turns out SFL has a complicated arrangement with Frontline Ltd. (FRO) in regards to its finances.  This was far more complex than my newbie investor mind was prepared to handle.  When things turned south for FRO it took SFL with it and I was now the proud owner of a stock which had just lost 55% of its value.  Ouch!  (Update: with the new year market rally my loss is down to 36% as of 2/17/12).  It may also be helpful to know that these are “paper” losses, I have not sold any portion of SFL which would lock in an actual loss.

Ok, so I can hear some of you guys asking yourself, “What the hell did he learn from this train wreck!?”  Glad you asked, lets take a look.

  • Lesson 1: Don’t Panic!  This was my first big loss on a stock purchase and up until this time I had no idea how I would react to such an event.  I thought I knew, but until you’re tested you don’t know what your emotional reaction will be.  I’ve now learned that I can take a hit and keep my wits.
  • Lesson 2: Know what the hell you’re doing!  I had no business in purchasing SFL because I really didn’t understand it.  I own T and MCD in my portfolio and I know how they make money.  I didn’t have this knowledge with SFL, all I knew was it had a pretty yield.  Yes, sometimes I need to be smacked in the face to learn something.  Apparently losing 55% of my money is a sufficient smack. * rolling eyes*
  • Lesson 3: Don’t chase yield!  Yes that yield may be pretty and shiny and you may want to possess it, but don’t let the $$ signs cloud your judgement.  If you really want that high yield you better be damn sure you know why it is that high and willing to assume the risk with eyes wide open.
  • Lesson 4: Have an idea of when to sell.  This is a weakness for me.  I spend a lot of time determining when I will buy, but not enough in deciding when to sell.  I seriously considered cutting my losses and applying that loss against my gains in other stocks to offset the tax liability.  On the other hand I had the notion of not letting short-term stock price fluctuations influence my investment decisions.  Ok, with all due respect to my rational self, losing 55% is not a “short-term fluctuation”, it’s a bona-fide lose your shirt, fall off a cliff, apocalyptic event!  So that’s a bit theatrical, but you get the point.  Truth be told I didn’t act because I really didn’t know what to do.  I didn’t have the experience to judge what the best course of action would be so I decided not to act  and take a wait and see approach.

I’m still not sure what I will do with SFL this year.  I may cut it loose or continue to hold and see if I can regain some of the loss.  I am lucky that it represents a small portion of my holdings so my overall portfolio was not impacted (drastically) by this loss.  Regardless of what course of action I decide on I firmly believe what Loeb said about knowledge born of experience being the path to profits.  Yes, this lesson cost me in the short-term, but what have I gained over the long-term?  Hopefully just a little bit of wisdom, which is nothing more than knowledge + experience.

How about you, any hard learned lessons on your path to becoming a wise investor?

The Power of Thought

I usually don’t post on the weekend, actually I don’t really have a schedule but it looks like Monday and Thursday are turning out to be posting days.  Today was different.   While cruising around the net trying to pick up chics, er, I mean blogs, I found a true gem.  If you have not yet come across it check out  Very nice thought provoking writing, the kind of fix The Stoic is out to score.  A particular post really got my mind to churning and hence today’s post.  You can find it here, but I want to share a couple of sentences that made me pause and think (always a good thing).

The way that each of us thinks makes the major difference in where each of us arrives.”  

This goes to the heart of my own recent transformation with financial matters.  The things I’ve done have been what frugal people in all places and all times have always done.  What really changed was my thinking and that transformed my behavior.  If you stop for a moment and really reflect on where you are today in your life you can generally connect it to the series of thoughts linked together as a chain that influenced your behavior that had a cumulative impact on where you are.  If you have always been a saver you are most likely setting on a nice net worth with little or no debt.  Did this happen overnight?  Did you wake up one morning and decided you would have a nice, fat bank account?  The answer is likely no.  Think of every thought that you had that led you to act a certain way that was responsible for the fiscal rewards you now enjoy.   Consider the opposite (my former self).  I spent every dime I had, massive debts, paycheck to paycheck living and a failed marriage that ultimately found the origin of its demise in failed fiscal policy (yes I am one of the statistics that claim finances being one of the main reasons couples fight).   What was my thinking in regards to this behavior?  Are you sitting down?  I literally thought money was of no significance.  I can remember a time in my life (most of it) in which I openly claimed that money was not important.  I’m not sure what I was smoking back in those days, but someone should have come along and smacked the shit out of me and try to assist in removing my head from the dark nether regions in which it was so shamefully lodged!  It was thinking that made it so and in this case a poor quality of thinking,  which is responsible for a good deal of human misery.

Here is another quote from the website that I really enjoyed because it goes to the heart of the freedom/independence I so passionately seek at this juncture in my life:

“Independence is not something one has; it is something one is.”  Jacob Fisker

This sentence is like a dagger to the heart, it penetrates so deeply and completely to leave the landscape of ones soul thoroughly changed.  I’ve been going about it all wrong.  I’ve been thinking of my freedom/independence as something I could possess or a destination in time I would someday arrive at, but that’s not it.  Instead it is what one is and that is powerful stuff.  For it’s not x amount of an investment balance or some passive income stream that will support you forever and ever.  No, it’s being so independent that one is less and less in need of such things and that is an entirely different conception of independence.  It is being independent vs. having independence.

Hope you guys are having a great weekend and well on your way to discovering the independence that already lies within you, even if now it lie dormant.