Path to Confidence: Build an Investing Playbook

0:00Mike Tyson famously said, everybody has a plan until they get punched in the mouth. And in the stock market, it's pretty much the same thing. It looks like your favorite company is randomly cutting their dividends or the stock price drops by 15 % by lunch. If you rely on your gut instincts in that moment, you're going to lose money almost every single time because emotion takes over. You're not prepared for it. So today, Andrew and I are going to talk about how to build a mechanical plan, a playbook, if you will. We're going to help walk you through how to build that plan so that you can survive when the punches start landing and you don't freak out.

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2:15Just as a warning, I am having trouble speaking today. I keep getting tongue-tied, so bear with me, because I'm not about to edit all that out. No, I'm kidding. So today, Andrew and I are talking about just how to take away the emotion when we should be panicking. and you know andrew i don't know about if you've ever had an experience like that but there are certain well i'll share a story uh when i was in basic training i asked one of my my drill instructors um you know what it was like for them the first time they ever saw combat and he's like you know i honestly don't even remember it and it's like huh like that's so crazy to me how can you not remember something like that he's like man he's like when when when things like that are those super high stress situations or whatever start happening you real you just start to rely on your training your training takes over everything all that muscle memory kicks in and you just start reacting based on your training then i've heard the exact same thing from police officers firefighters emts doctors um when the stresses are real like the training all that rehearsal takes over and so andrew that's kind of what we're talking about today have you ever had an experience like that to where you're just like your your training kicks in and you take over just out of curiosity no but i did keep my car from hydroplining one time and i'm pretty proud of that hey that's that's a solid that's how one how do you keep your car from hydroplaning apparently i'm not as good a driver as i thought my i i remember my dad used to always say like if you if you lose traction in your tires don't try to do anything you just keep the wheel steady so i may or may not have been driving at a speed that was not appropriate for the street I was on.

4:30And it's not my fault. There were sprinklers spraying onto the street where I was on and I felt those tires slip, but I just, it probably was just me being more panicked than remembering the advice. And I just froze, but it worked out for me in that moment because then I didn't overcorrect and I was the car, those tires slipped and then came back and it would have been bad because there was a car next to me also driving at a speed that was not appropriate and that could have been trouble yeah i mean i mean that's a great example my dad um you know growing up in the midwest you know we always get a ton of snow and similar advice you know if you start to start to slide you you don't try to correct like you normally would you turn into your slide and uh kick your car into neutral um that or if you're driving manual press press in the clutch um but you just want all power to stop going to your wheels and you don't like slam on your brakes or anything um which i feel like a lot of people like that's their instant reaction something's wrong i gotta slow down um and that wrote that like while you were talking that reminded me of a of a instagram video i saw a couple days ago where a guy's brakes went out on his pickup truck.

6:02Apparently, something happened to his brake line or something, and just while he was driving down the street, he lost all his brake fluid and had no brakes. So he was able to swerve. Fortunately, the road wasn't super busy, and he was able to swerve and get his truck stopped before he hit the stopped cars at the stoplight. You know, fantastic point of not panicking. Yeah. Right? Never had that experience. But the point of this is, you know, if we allow ourselves to get into a place where panic does set in, then that's when we try to slam on our brakes when we're in that hydroplane, which is going to send us right off the road.

6:53and investing isn't any different, Andrew. So I thought I would bring a practice that I learned while I was day trading to all of this. The, I call my if then plan. And so for clarity, when you're day trading, a trader always knows the point, or they should always know, a good trader will know, the point that they are entering a position and the exact point they're going to exit the position. And they will have several entries planned and several exits planned.

7:36The reason being is because, you know, if they're wrong about the stock, then they don't want to lose all their money in that stock. So they need what's called a stop loss to stop losing any gains or any capital that they have invested. Or, you know, you don't want to get out too early and miss a ton of profit. So, you know, you have to plan for all these things. And it's a very meticulous process that you go through. And when I started with you learning how to invest rather than trade, I realized that that's, I don't know if it's something that's just done automatically for a lot of investors, but I've never really heard investors talk about having a plan to exit a stock.

8:32Have you? other than myself no it's not very common that's like one of the least talked about things in general is like when you sell a stock because everybody wants to talk about buying it right absolutely and so I mean you got to think about these things Andrew brought up a scenario and obviously he was blowing it way out of proportion I don't think it could realistically even happen But what happens if a stock in your portfolio suddenly and or accidentally becomes a vast majority of your portfolio? You don't want that. So, you know, in that scenario, you need to have a plan like, OK, this is happening.

9:17I need to start offloading the stock. and uh i feel like when when things turn really bad um you know heaven you know heaven forbid we we hit another bear market or something like that that's when that panic selling and there's even a term for it uh starts to set in and that is the exact opposite thing uh we want to have happen um so one of one of my rules is if uh you know and i i i don't i'm not going to try to quote warren buffett but i know this it was his strategy as well when when the stock price tanks because the market is is going down that's whenever i go shopping wholesale and that is the exact approach that I want to take rather than freaking out like oh my god my portfolio is down to 15 % overnight because X happened you know another COVID or something like that that just feels like it's ruining your portfolio we got to have a plan to keep us from pulling those triggers and tanking ourselves yeah it's a really good one especially if like you said the entire market is panic selling then you know that it's panic and because like if it's one stock in your portfolio maybe that stock's really tripping up like i don't know what nike something like that uh too soon no no um but if like you're saying uh to give you the warren buffett equivalent he He says when there's blood in the streets, that's the time to be greedy.

11:07So that's the exact philosophy. Do you have a particular number you're thinking of when you have that if-then for yourself? Or is it more just watch for it and observe it and then go for it when you see it? So each stock, for me, and you can build this however you want to build it. You can build it for your whole portfolio. uh i personally have it for each individual company that i own um you know if spotify does x then then they go bye-bye if uh spotify does y then i want to buy more um type of plan but i i feel like if you if you if you just make it for your whole portfolio that can be a dangerous ground as well because there's still plenty of panic that can set in inside your portfolio alone.

12:08So should you have a portfolio if then plan? Sure. But for me personally, it's every single stock scenario because every single company is different. And, you know, to the COVID analogy, every single stock is going to react differently to that happening. If I own Zoom and another COVID-like thing happens, you know, that stock's going to go through the freaking moon. So that would be vastly different than if you own stock in Uber in a COVID-like scenario happening. and happening again. So for me personally, Andrew, I think it's got to be a stock per company thing that you do. Do you have any specific examples of one that you could take from your portfolio to kind of illustrate what you're talking about?

13:08Yeah, absolutely. So we'll use Spotify, for example, because everybody knows that I own Spotify. um uh for for my if um then for spotify if spotify stock uh dips uh because it's been pretty uh um volatile uh since i've owned it um anytime i see a 10 dip in their stock price um i'm going to go ahead and scoop up another couple shares. I have a reserve set aside just for that to help me grow my position there. Again, with being so volatile, I was really worried about holding on to a loser because like you said, ultimately we're betting on our research, right we're betting on the ceo we're betting on the product and so i just wrote down for my uh uh my uh other if then avoids the sunk cost fallacy um so i watch spotify very closely again if their their stock dips in a day um 10 percent um which has happened a few times since I've owned it in that day, then I go ahead and buy some more shares of it while it's down.

14:42If it gets to a point to where I'm really concerned that it ended up being a bad investment, just reminding myself of the sunk cost fallacy and that I need to just hit that eject button and get out of it while I can. What other kind of if-then statements have you come up with for your portfolio. Four apps, four different logins, and it never fails. There's always that one password I absolutely cannot remember to save my life. Charts in a few places, research somewhere else, actually trading on a fourth platform. That was me for longer than I'd like to admit. But Moomoo puts it all under one roof.

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17:59Sometimes it's just, hey, this is what I'm watching out for. We can use Adobe, for example, with the CEO crisis they had for a while. I could write on that, if they don't have a CEO picked by this date, I'm out. Because at that point, I don't know who I'm giving my money to. And that makes me uncomfortable. I don't like that. So, and it's, if that happens, I hit the eject button. I'm out of the stock immediately. No questions asked. And to me, that's one of the key triggers to this whole process is that I put an extra amount of thought into what I'm saying about each individual stock. Going back to the Adobe example, you can literally write whatever you want, but it's individually based.

19:01So them not having a CEO picked out by, you know, mid-year may not freak Andrew out, but that really freaks me out. So that is my eject button. And it is, I've put so much extra thought into that process. Like, you know, I understand about myself that I do not like that they don't have a CEO picked out, yada, yada, yada. once that trigger happens there's no question to to it like instantly the triggers happened i sell it meaning i don't go back and research it again i don't oh well let me check these few things it's no i just sell um and to me that's important because i can talk myself into doing or out of doing anything.

19:55And most of you are probably the exact same way. I dare say all of you are the exact same way. We are great manipulators of our own brain. And so for me, I want all that emotion and logic taken out of it because I needed to be a trigger in that moment. And that's exactly, you know, in the opening analogy, that's exactly what muscle memory is. It's something that just happens without your brain having to think about it. And so that's how I put this process into practice is just, it's hit this trigger. I automatically do it. I don't research it. I don't think about it. I've already done the work ahead of time so that I can just react the way that I've decided I should react.

20:45I think it's good to get ahead of potential issues ahead of time. You know, like if your thesis changes on something, then sometimes it's easier and better to just cut bait rather than try to justify yourself into saying, well, I was wrong, but maybe they'll still make money. Like that's such a bad place to be as an investor where you're just waiting for a company to make money. they're not gonna do what you originally bought them to do you're sitting there like cheerleading them every day like come on come on guys you can do it the little stock that could but and i mean the the the the whole emotional side of of what we do and we've talked about it so much because money is such an emotional event for us um whether it's good or bad that can be discussed later but you can't deny how emotional emotionally tied we are to money and i i don't know about you i've never made a single good emotional decision in my life they've always been stupid um stupid decisions and that's probably just me but um again just being honest with myself knowing that i can't live in that world and just react in the moment.

22:09I got to have a plan. And for me, Andrew, I write it all down. And it's where I can find it. I don't have it all memorized, but I know enough of it where it's like, okay, if this happens, I need to go check my if-then plan and see if I need to do something um but i in my opinion you gotta write it down you you gotta have it somewhat rehearsed slash known so that you can realize you you need to go check um or if you know yourself you're like no i gotta memorize it then don't freaking memorize it it's not hard to memorize um unless you own 50 stocks that would probably be hard but uh i don't know like have you ever done anything like this or even thought about it?

23:08Yeah. I mean, like for me, the big one has always been if a company cuts their dividend, I'm going to sell that stock. It's just a really hard place to be when, because usually a company's paying a dividend and people are expecting that income. So if a company's cutting that dividend, that's a pretty desperate signal. And some companies can recover from that and they can, you know, change their fortunes and things like that. But, um, I like having at least a couple hard and fast rules and that one is one I've stuck with that I'm happy that I stuck with. Yeah, definitely. Did you write, do you write it down or does it just in your head, you know?

23:56No, it's pretty obvious when it happens. So, okay. When I say cut, I guess I should clarify then. I mean they used to pay a dividend and now they no longer pay one. That's my definition of cut a dividend. So it's usually pretty extreme. What happens if they drop it from 6 % to 1 %? Yeah, I mean, I would definitely look into that. Why is that the case? It doesn't make sense. But just cutting it completely, I think, is such a drastic move. Okay. No, I totally understand. I'm just trying to understand. Or trying to get into your mind space, I guess. So it's not the losing of some of the money. is the complete loss of the money that really triggers you and would cause that emotional reaction.

25:02Got it. I could expand on that a little bit further too. So at that point, they are no longer returning capital to shareholders and you don't know if they'll ever get back to giving money back to shareholders. And so like one of the big reasons, and it's not always the case, up to now it's been the case, but I've been like looking for the exception to the rule. But up to now, it's like every stock I buy, I want management to be returning some capital to shareholders, whether that's a dividend or whether it's a buyback. And so if a company is not doing buybacks and then they cut their dividend, now you just don't know.

25:38You're literally betting on management and the company to continue to grow and to do good things with the profits. I like situations where there's already a precedent, there's already a track record of what they're going to do with the profits. you know as a shareholder you're going to get some of that back and those are the types of situations i like to buy into that's kind of like my sweet spot um because it makes sense for my risk tolerance level i know even if things go wrong at least they'll still have progress as a shareholder and um yeah you lose some of the big gains because obviously a company that can invest more has a greater chance of growing higher um but i kind of like that balance of growth and capital return.

26:23So when they cut a dividend completely, there's no longer capital return. And it's just a good excuse to just break up and say, it's not you, but it's you. Bye. Love that. Nah, it makes total sense. And, you know, like I said, writing things down is my thing. I write everything down because if I don't write it down, I'm going to forget it. um so i mean if you can do it in your head do it in your head there's no rule that says you have to do it my way but i think the most important thing is you've you've thought through these things and you know it will help you avoid that emotional reaction um for me andrew one of the key aspects of this is this goes this goes into effect before i ever buy the stock i try to think through all the possible things that cause me to have a emotional breakdown if you will and either and just do something stupid um and pre-plan and prepare for what what that's would look like, which is, that's 100 % why this made it into the list of helping you become a more confident investor.

27:46I feel for me personally, this has helped me become confident in my investments leaps and bounds because like I said, there's always a plan. the thing i don't want people to get stuck on is one of the things mike tyson missed in his famous quote is that yeah your your plan changed when you got punched in the face uh however you still have a plan it is much easier to if you have a plan and everything goes haywire and wrong to shift off of your plan than it is to not have any plan and just hip fire it and see what happens uh that rarely will work out and there's tons of psychological research done as to why it is why our brains work better this way um but for me it's it's you know whenever knowing that i have that plan gives me such a peace of mind because I know I have something to fall back on.

28:55I don't have to start building from the ground floor when a crisis does happen. And being perfectly honest, it's inevitably going to happen. We are inevitably going to have a bear market eventually again sometime. We are inevitably going to have something happen that is going to be detrimental to the market like COVID was or like the 2008 housing crisis was or whatever financial crisis, sorry in 2008

29:35that's going to happen again it has to so being prepared for those things gives me such peace of mind What is the plan for Great financial crisis part two, you know, the 2030 edition. What is your course of action there? Hey, like Warren said, when there's blood in the streets, it's time to buy. Definitely. It's rule number one, stay calm. um that's my high top of the list very top of the piece of paper just stay calm don't do anything um and that you know coming up in leadership in the military that was one of the hardest lessons i ever learned andrew i felt like as as a leader of troops i needed to be making decisions all the time and standing still was the worst thing possible that we could be facing and a very wise mentor told me that sometimes the best course of action you can take is nothing um and you gotta be wise about it you can't just freeze but sometimes you just you need to stand still take in what's happening around you and figure out what you need to do and so um that that's rule numero uno is don't freak out.

31:08Don't do anything. Just, just be calm, take into my surroundings, figure out what's happening. And then I can adjust from there. Um, and then, yeah, like as I, you know, and it's different, you know, if all of a sudden our dollar is devalued for some reason and now i'm we're having to worry about you know feeding my family then plans will change and that's fine um do i have a specific plan for that no but again i'm just you know the number one rules i always revert back to the number one rule stay calm don't do anything figure out what's happening and so for me that that's that's the approach i will take to that but yeah so i don't know if that makes sense andrew but sometimes to me the best course of action is just no action and seeing what was you know making sure you have a good understanding so uh again we want to leave you guys with actionable uh uh strategies so as soon as you get to a place if you're driving uh don't do it now but as soon as you get done driving uh just pull out a couple of sticky notes and write if and then if you own a specific stock then write that stock ticker or whatever and then write your plan for if this stock does this then I do X.

32:46And write yourself down a couple of those and then start implementing that into your practice when you're doing your research. If this stock drops in price or whatever, then I want to buy more if you're confident in it. Or if, like Andrew said, if this stock cuts its dividends, then I'm out of it. I hit the eject button. and just write a couple of them down, see how that helps you feel. And I would be really curious to know once you've done it, if it gives you kind of a peace of mind like it does me. So that's going to wrap that up. But Andrew and I, we had a really interesting question come through on Spotify.

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35:08I don't know, Andrew. Do you want to take a stab at this dude's name? I don't even know. Ramoski. I'm going to go with Ramoski. I promise I'm butchering that horribly. I apologize. But he asked, please help. I love the podcast. I've been driving or driving through them, but I was given a large sum of money and nobody in my family or friends has ever had extra cash and I don't want to waste it. I've been told 80 % index funds, 15 % strong company stock and 5 % personal picks. Please help me not waste this opportunity. So first of all, congratulations. uh, unless it's from a inheritance, then I'm sorry for your loss.

36:03Um, but I don't know, Andrew. Uh, I guess the first thing I'm going to say is we are not financial advisors and we are not giving you financial advice. Yeah. If I got a large sum of money, then what do I do? Um, You kind of have to almost zoom out and take a step back before just diving into the prescription, which we all want to do. And having a put percentage here, put percentage there, put percentage there feels really nice. But you do want to put things into context because a large sum of money could mean$10 ,000. That could be a large sum of money to somebody. It's like, hey, that's a nice trip to sandals.

36:52Or we could be talking about a million dollars. Like, hey, I could live off this money for the rest of my life. And so we don't know the answer to that. But with that in mind, I think knowing that sum and how important it is to us is one question to answer for ourselves. The second question would be, how long am I going to invest this money? When do I need this money? If you've listened to our show at any length of time, you know that we say, hey, if you need this money like three years, five years, even seven or eight years from now, do not put it in the stock market. There have been 10-year periods where the stock market has lost money.

37:36The stock market's not this magical money machine that just always makes money every year. But if you have a long time horizon, if we're talking about 20 years, 30 years, 40 years, then let's talk stock market, let's talk investing. And then from there, the first decision is, do I split up this money or do I put it all in at once? And so in my mind, the bigger a pile of money it is, the more I would want to spread it out personally.

38:09unless I was 100 % confident. If it was me personally, because I've been buying stocks for 15 years, 14 years, I'm very comfortable with just letting it ride for a very long time and then not touching it. But if you're just new in your journey, let's say you've been picking stocks for six months or a year and you haven't lived through... You could argue I haven't even lived through a bear market, how little I've been investing. But if you haven't lived through a bear market, your future self might thank you if you're a little more cautious and not trying to put all of it at once. So I don't know.