Revisiting My Emotional Risk Tolerance v2

I’ve been very fidgety these past few weeks.

Everything I thought I was (emotionless against volatility, hold for long term, 100% rational), I wasn’t.

It made me think of a quote from Charlie Munger:

“Each person has to play the game given his own marginal utility considerations and in a way that takes into account his own psychology. If losses are going to make you miserable – and some losses are inevitable – you might be wise to utilize a very conservative patterns of investment and saving all your life. So you have to adapt your strategy to your own nature and your own talents. I don’t think there’s a one-size-fits-all investment strategy that I can give you.”

And I have to admit, paper losses make me miserable. My transactions from The Link REIT (SEHK: 0823) and Wharf Holdings (SEHK: 0004) last year earned me a handsome amount of money, and that felt really good, but seeing my Vanguard ETFs go down in price has made me miserable, even if it has dropped by a mere ~3-4%.

Everyday the commentaries / news of the US stock market being overvalued just bothers me for fear of a global stock market meltdown, and everyday the updates of value investing gurus I respect a lot returning cash to shareholders or accumulating cash makes me very nervous for fear that I’m not maximizing my opportunity cost by holding cash as well to capitalize on future opportunities.

I think I have to revise my plan of action. Even though my strategies (Active Indexing, NCAV Stock, Great Companies) are sound, I think the only strategy that would work with my temperament would be a Great Company stock strategy.

Accumulating cash calms me down, and the prospect of being able to fully focus on reading everything about Great Companies and potentially associating with them during a bear market excites me. And I just love dirt cheap bargains for world class merchandise.

Even though this means giving up returns that only small investors like me could benefit from (such as NCAV stocks), it also means I wouldn’t prematurely quit my investments and incur losses due to inability to withstand volatility, which would be even worse than making less positive returns.

I will be selling all my Vanguard ETF holdings at the average price I bought them in the mean time. The losses I incur shall be the commissions I paid buying and selling, which is negligible to me compared to the potential loss of capital.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

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