The Silent Brain Whispers And Your Investment Emotions
Decode Your Feelings That Create Your Stock Choices
If you’re new here, a warm welcome from my side! If not, you know what to do.
I’m Michael and on a mission to make beating the stock market as easy for you as choosing your favorite ice cream.
I write an algorithm that does exactly that.
Read the full story here.
“Most things in life, be it in the stock market or a quirky board game, are a gamble and involve some sort of risk. We all know, that the key to mastering both lies in understanding the deep, hidden games our mind plays with us. Time to find out.”
Part 1: Before we dive into our mind a quick update.
I’ve been diving deep into the universe of cloud computing. Picture me, goggles on, dissecting this massive puzzle.
It’s intricate and there’s a ton to fine-tune. But hey, Rome wasn’t built in … yeah, you know!
As I lifted my head up for a moment, other pesky tasks from my to-do list were waving at me. And they are absolutely right. First things first. So, I am giving the cloud a timeout until I finish the rest.
Why am I pushing so hard?
The real thing is this
Unless you’re in the game, you’re just a spectator with no skin in the game. By year’s end, I’m dropping 10k into each strategy. It’s like putting my algorithm into the gladiator arena. 2024 is D-day (or should I say Reality-check?), it is the moment of truth. If all goes as coded, my brokerage account should echo its numbers. If so, I’m pushing more chips to the center of the table! By the end of the article, you will understand why.
Next.
Our Optimization Journey
Parameter optimization is on boost mode! Out of the 1536 variants, 144 are looking like prom kings and queens.
The numbers are looking good:
Betas below 1
Standard Deviation (aka the “tube” radius) ranges from “cool” 22% to a “brewing” 37.48%.
And a CAGR (Compounded Annual Growth Rate) swing from 17.72% to 24.16%.
(Click here and find a quick refresher about the above numbers.)
My current favorite?
Strategy number 73.
With its good to-swallow standard deviation of 32.98 and a CAGR of 23.24%.
Here is the comparison of positive and negative returns compared to our August Strategy.
Below is a sneak peek at the theoretical returns (as always, no fees and taxes and we are rolling the invested money each year).
Put differently.
Don’t focus on the short term, focus on the long term.
And the Red Years?
Yep, they’re like those party crashers. Everybody hates these worst-case people and yet they are always part of a party.
The worst-case scenario for the above strategy would have been, if you would have jumped on board in year 10, right before the financial crisis. Two years in, and you’re left holding a $61,871.50 bag. Hard to swallow, right?
Who’s the villain? Me or Mr. Economy?
Many might run for another “cozy” corner. But those who stick to the strategy? They’d not only recover but also see some sweet return in return.
Who’s the villain now?
If you believe in your strategy, you stick to the dance.
Let’s ignite part 2 of the article.
Part 2: The Mind Game
A short warm-up story.
The Billionaire’s Gamble
On a sunny Saturday morning in Newcastle, Washington, Lucy is on a mission. Channeling her inner squirrel - garage sales. Amidst VHS relics and sports equipment, she stumbles on the game “Billionaire’s Gamble.” $5 later, it was a game night!
Fast forward, Lucy’s living room turned into Las Vegas. The mission? Invest in everything from zany lemonade stalls to space dreams. As the night unfolded, some friends go all in, full ‘Wolf of Wall Street Style’, throwing their entire fake fortunes at the wildest ventures. Ventures like “Underwater Basket Weaving” and “Penguin Pizzerias”. When the dust settled, some people made fortunes and others lost them.
Meanwhile, Lucy, the little squirrel who’d played with the focus of a cat stalking a laser pointer, landed right in the cozy middle.
Over post-game brownies, they laughed at their in-game behavior. But deep down, many realized that their fictional financial fiascos weren’t too far away from their real-life money belly dives.
The moral? Life is a mind game, and it’s okay to chase your dreams, but don’t bet your entire stash of acorns on it. Moderation is often the wisest route.
Life’s Game: Rules and Your Mind Game
I have two rules.
Stick to your rules
Understand your brain’ t(r)icks
These have been my guiding stars. Because when you venture too far or too high, you might end up broke or dead.
Those “all-in” people? I tune them out. Here’s why. Dive in without a backup plan, and you’re bound to make everything an all-or-nothing gamble.
And hindsight is always 20/20, right?
Understand this.
That’s your brain’s sneaky way, led by our not-so-friendly emotions: one for example is greed. It’s guiding you into hot water. In a minute you know how you get out of it again.
While I’m all about tweaking the algorithm to dodge those market plunges (it’s on my checklist!), betting your entire stash? That’s a rookie mistake.
The ideal scenario?
Invest, then pretend it doesn’t exist.
Think of it like a resilient cactus in the desert, not like a needy fern that asks for water every day.
If you can’t do that, you’ve invested too much, my friend.
Why’s it so darn hard to keep our emotions in check, despite the oceans of advice?
Simple: many of us are clueless about the birth of our emotions and beliefs.
Enter your mind
Visualize this: You, center stage, packed in your fears. These fears? They’re holding your armor, directing your mindset. Sprinkle in some knowledge, and voilà, you’ve got a behavior blueprint based on fear.
And that guides your actions. That’s a sandy foundation.
Now let’s get a step further.
If you’re attuned to your inner world, the picture morphs dramatically.
You are still in the spotlight, but now encircled by knowledge and wisdom gained through a bunch of reflecting work and learning. This time, you forged the shield based on knowledge, empowering a more informed mindset. Fear? It shrinks, either to a manageable size or poofs away.
The result? You have way more room to behave and thus a different outcome.
Part 3: Deep dive into your mind: Why’s it so tough to keep our emotions on a leash?
I’ve almost written a book about fear. Along my research, I stumbled upon Chris Argyris’s model, the “Ladder of Inference” and Dave Gray added his flair to it, birthing the “Pyramid of Belief.”
(Side note: Here’s the thing about mental models: they’re like filters for life. They help unpack and simplify a complex scenario that often intimidates us.)
Models aren’t the “truth” (because let’s face it, life’s a mess), they are a great starting point for untangling the mess.
Here is how I approach my life
When something bugs me, I turn to my trusted mind model.
(I've adapted Gray's model to my needs)
Picture yourself standing on the ground, soaking in the world's wisdom, observing mundane facts. Things like raindrops and passing cars and whatnot. Context is the next step because it’s everything. Are you relaxed in a park or grinding away at work?
As life unfolds, we’re a mix of wants and needs. Like craving a pizza (want) or needing shelter from the rain.
Based on that, our focus sharpens and we turn on our attention part of the brain. First assumptions form, and if they play out right, we have first conclusions and, voilà, a second later, we have a belief.
These beliefs (conscious or unconscious) craft our values, the silent puppeteers of our actions. Ever wondered why you value humor in a partner, why you’re chasing that promotion, or why you freak out? Welcome to the intricate dance of beliefs, values, and the things you do (actions) – that’s us and our ego wrestling on full blast.
Watch this short video.
My takeaway?
Our opinions are what they are, pretty shaky, and if you don’t reflect how you came up with them, they fool you. The closer you are to the top, the more subjective your thoughts become. The closer you are to the bottom, the more objective your thinking is and the better your decisions usually are.
This helped me
It finally clicked for me when I understood one trick. Put your values to the stable part of the pyramid and understand your wants and needs on a conscious level. You usually get there after you’ve done some reflecting work.
This model is my daily compass. Sometimes I glance at it; other times, I study it deep to understand what I’ve done.
I urge you.
Walk the walk, in order to understand this for yourself. If you don’t, you’ve wasted time. The magic starts when you recognize its existence, admit it, and let it guide you. In the beginning, it’s a labyrinth, but the insights it offers are worth their weight in gold.
I know. That’s a lot to swallow.
Progress
Optimization Part 1? Check! My ranking function works.
Plan
Try to improve the ranking function
Compute even more raw data
Plan the Red-Flag-Report-Code. If a stock dips post-purchase, I want to know why and if it’s a statistically significant red flag. Maybe we can decrease the downside even more.
What’s on my head
The clock’s ticking. 74 days to 2024. So, let’s hustle!
Hit the heart if you want to stop your mind from playing tricks on you!
See you soon, StockStar!
Michael
P.S.
Nuggets I’ve enjoyed:
I loved this documentary. It shows in a very loving way how our parents impact us.
If you are on
, you want more perspectives. And if you like the look behind the curtain, this might be for you. by
If you think somebody should read this, be a good human, share it, and make them happy
Disclaimer:
The information in this article is my personal opinion. I’m not a certified investment professional. It is not consulting, nor does it constitute investment recommendations.
I do my research carefully and follow my personal investment strategy.
The stock market is a complex building with its own rules. There are no rules set in stone, like the rules of physics.
Therefore, use the contents of this newsletter at your own risk and do your own research as well. Investing in the stock market can lead to a total loss of the capital invested.
great take, danke! :)