Has the stock market bothered you? Write a D-Day Note

That’s just about every investor’s motto when something goes wrong. In the olden days, you could blame your stockbroker or fund manager for losing your money. Now that your stockbroker is your phone and your fund manager is an index, it is very hard to point your finger at anyone else.

If you’re left with no one else to blame, the obvious way is denial — especially at a time like this, with shares down nearly 8% so far in 2022.

Individual investors are experts in denial. So do it professionally.

This is due to cognitive dissonance, which creates tension when belief and reality collide. You believe that you were right to buy that stock; It is now down 75%, suggesting you may be wrong.

What would you do? As economist John Kenneth Galbraith likes to say, “Between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.”

Let’s meet John Hussman, Portfolio Manager of Hasman Strategic Growth Fund, who has a net worth of around $400 million. According to Morningstar, the fund is up 10% this year, outperforming the S&P 500 by 18 percentage points — but trailing the market in nine of the past 10 years.

Over the past decade, the S&P 500 has grown an average of 14.6% annually when calculating dividends. The Hussman Fund has reported a loss of 4.7 per cent annually. $10,000 in S&P 500 investments rose to over $39,000; The $10,000 in Strategic Growth would amount to less than $6,200.

The main reason, Mr Hasman wrote in the fund’s last annual report, was a “perfect storm” of speculation triggered by “the Federal Reserve’s deranged experiment with zero interest rates”.

To his credit, in an interview Mr. Hussman eats a heap of crows. He points out that the fund’s poor performance came from its consistent stance that the stock market was overvalued. Strategic growth would buy put options, sell call options, or both—techniques to profit from a fall in stock prices that almost never occurred.

“I was obviously very bearish during QE” [the Fed’s period of low-interest-rate policy]Because I believed there were still historically credible limits to speculation,” Mr. Husman says. “Once interest rates dropped to zero, those limits not only became useless, but answering them was harmful. Done. I got that wrong. I don’t blame anyone.”

Not at all, anyway. “In my rough moments,” says Mr. Hasman, “I have said that I underestimated stupidity and underestimated intelligence. But the fact remains that it is my responsibility to address the challenges.”

In late 2017, a year when the fund underperformed the S&P 500 by about 35 percentage points, Mr. Hussman limited (but did not eliminate) his flexibility to profit from market downturns. After that adjustment, strategic growth outperformed in 2018, although it lagged again in 2019, 2020 and 2021.

A chart in the latest annual report shows that the fund’s hedging strategy since 2010 has eaten away at all of its cumulative returns since its launch in 2000 — negating years of outperformance in its early history.

Still, Mr. Hussman is sticking to his guns, believing the market is more valuable than ever.

“Dissonance is normal and inevitable; we all feel it,” says social psychologist Carol Tavaris, co-author of “Mistakes Were Made (But Not by Me)” with Elliot Aronson. But, she says, preparation can help us “look it in the eye, self-justify and live with it before jumping to the defense, and more calmly assess the wisest course of action from here on out.” “

Some techniques can help.

Stop constantly talking about your investment ideas. Discussing them publicly deepens your commitment, which makes it even more difficult to change your view.

Take a cue from baseball, where scoreboard and box scores include not only hits and runs, but errors as well.

Instead of hiding your mistakes, put them on the board.

Were you so confident that you were right about an investment that you believed no evidence or event could ever prove you wrong?

Instead, force yourself to estimate the probability that you are wrong – and 0% is not the accepted answer.

In the end, be prepared for the pain of being proven wrong by pretending it’s already happened. On the eve of the successful D-Day offensive in 1944, General Dwight D. Eisenhower wrote a brief press release on the Allied defeat. It ended: “If any flaw or flaw is associated with effort, it is mine alone.”

Before making a big trade, consider writing a note like this: “My investment has failed, and I’m selling. I made a decision based on information I believed to be valid, but I was wrong because [blank], It was a bad investment, but that doesn’t make me a bad investor.”

This will not stop you from doing business. But if your great idea turns out to be a mistake, your D-Day note will prompt you to fill in that blank—and make it easier to admit you were wrong without feeling silly or incompetent.