For the past 12 years, I’ve been preparing myself for the next big downturn. With the markets falling to pieces over the past month, that event may finally be here–the lasting economic impact of COVID-19 will be heavy.
Meanwhile, my automated investment plan has been doing its thing. While it has been nerve-racking to watch my account balances plummet, I appreciate the test of resolve.
As short-term investors have dumped stocks in recent weeks, I’ve been feeling increased pressure to take greater advantage of the resulting discounts. At one point, I even had a basket of companies that I was considering buying directly over the next few months.
That’s when Daniel Kahneman slapped me back to reality, via Jason Zweig:
Years ago, the psychologist Daniel Kahneman told me that one of the keys to investing is having what he called “a well-calibrated sense of your future regret.”
Jeff Bezos has a similar approach to making big decisions, which he calls a regret minimization framework.
After checking the stock quotes for the Nth time on Friday morning, I decided to apply a regret minimization framework to stock picking:
- I will never risk enough in individual stocks or even ETFs to make any real money in them. I’m too risk-averse. That means that:
- If I do buy stocks, it will be a small amount, for fun.
- If those small investments do exceptionally well, I’ll probably regret not irrationally putting more into them.
- I don’t want to regret acting rationally. If I don’t buy individual stocks at all, there will be nothing to regret.
Immediately, a huge weight lifted. I don’t speculate, not even for fun. Picking stocks is an unproductive distraction, and I’d rather spend my time on other things.
In the next hour, the market jumped 10%, and my discarded basket of stock picks did pretty well. I don’t regret not buying them.