Losses

Losses Feel Bad

There’s no other way to say it. Losing feels bad, plain and simple. Whether it’s small things like losing a board game or big things like being beat out for that promotion, losing feels bad. 

As our old friend Richard Thaler famously discovered, losing feels worse than winning feels good. It’s not an even balance! This also means we tend to remember the feeling of losing more than winning. 

This is especially true when it comes to our finances. Conversations and decisions around money are frequently very emotional, even though nothing else could be more- as the saying goes- “dollars and cents”. 

Money represents more than numbers. It represents our hours, hard work, and achievements. It isn’t just dollars and cents, it’s a valuation of everything we did to get it! And spending it isn’t just about buying something. It’s weighing if the thing we’re purchasing is worth the hard work we put in to get that money. 

And when we talk about long term savings, it’s not just about a savings account balance. It’s the road to a goal or a dream. 

With that in mind, it’s no surprise that we get emotional when we have to give away our hard earned dollars to pay taxes, or pay ridiculous amounts of money for necessary expenses like food or groceries. It’s especially easy to see why we get anxious when our future savings take a dive. It pushes our dreams that much further down the road. 

This can sometimes push us towards accepting non-optimal outcomes just to avoid the loss because it feels bad. Like refusing to go to the dentist because it’s uncomfortable but suffering worse dental health in the long term. 

These feelings are totally real and valid. But it is important to not let them rule our decision making. Losses feel bad, but they do have their place. 

Losses are Normal. And Temporary

As we all know from experience, losing feels bad. And, as we’ve learned from Richard Thaler, losing feels worse than winning feels good. With that in mind, it’s important to remember that our brains have the capability to make the loss feel worse than it is. 

To keep our investment losses in perspective, we must remember two things: losses are normal and they’re temporary. 

The impact of supply and demand is more human than it sounds. After all, it is subject to the whims of what people want. And what people want can change by the season, by the year, or based on the situation. Or based on nothing at all! 

These changes are normal. We see them all the time and they are rarely something we haven’t seen before. 

They are also temporary. If history is any indication, our markets have recovered after they’ve fallen. And that leads us to believe they will do the same in the future. 

It’s easy to dissociate the scary beast we call “the markets” from the actual companies, and people, it represents. What we see as a red line ticking up and down on a screen is actually a real company in the world. Real people that work to make it a success. 

Losing feels just as bad to those people as it does to us. It is built into our nature to want to succeed. These companies that we invest in have that same mindset. When we lose, we innately want to recover. The people behind these companies do the same. 

Sometimes, hearing statistics about the great market crashes and their recoveries just isn’t reassuring. But if we can keep in mind that the people behind these great companies we invest in want to win just as much as we do, we can rest easy knowing that the trajectory is up.

Losses are a Great Deal

Many places that we go have a price for admission. Whether it’s a museum, concert, or sporting event, there is a cost to enter. 

In the world of investing, volatility is that cost. To reap the benefits of investing, we have to be willing to accept that our investments can (and likely will) continually change price. After all, our investments increasing in value is what we want! However, we have to accept that sometimes the price will drop as well. It’s the price of admission. 

When we are in the midst of a market decline and our investments have dropped 50%, it can feel like a steep cost. It also feels unfair that it’s a recurring cost that can (and likely will) happen routinely throughout our investing lifetimes. 

However, when we look at the numbers, we realize that we have scored a great deal.

Though the declines are recurring and can be significant, over time, the average growth in our investments more than makes up for it. Unlike other purchases, we get our money’s worth and more! 

Losses also provide a unique opportunity.

Imagine that every time you went to a concert, you were able to buy tickets for the next concert at half price. And at the next concert, they offer you the same deal. You can endlessly attend more concerts at a great price! 

Market declines offer us that opportunity. Nick Murray once described market declines as a sale on investments. He said the stock market is the only store that we tend to run screaming from when they cut their prices in half. We should take the opportunity to buy more! 

When the payoff outweighs the cost and it gives us the opportunity to buy more great things at a discount, it sounds pretty enticing. All in all, it sure seems like a great deal! 

What we’re reading

Warren Buffet’s thoughts on Mr. Market by Ben Graham