The Psychology of Position Sizing

0:00Andrew and I have talked a lot about emotions recently, and we're going to talk about it again today because there's basically two sides of you. Even if you don't realize there are two sides of you, more than likely. The first side is the side that just gets crazy excited about a stock and you start acting like that stock just can't lose. The other side is the side that's so uncertain you can't bring yourself to pull the trigger and or sell. So today, Andrew and I are going to talk about taking that emotional temperature and figuring out how to control those emotions of either being too pumped up about a stock or maybe not being pumped up enough about a stock.

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2:25We cut through the noise to focus on what works, compounding, discipline, and the conviction to buy wonderful businesses and stick with them. Your path to financial freedom start now. And welcome back to Investing for Beginners. My name is Stephen Morris and across from me is Andrew Sather. And today, once again, we're talking about the emotional rollercoaster that is investing. And the reason, Andrew, I think this is so important and why we talk about it so much is because, you know, I've been through a lot of stuff in my life. But investing is one of the most emotionally challenging things I've ever done in my life.

3:14Like, you know, I would say it rivals a lot of, you know, starting your own business, things like that. Like, it's very tough, especially when it comes to managing your emotions. I don't know. Do you struggle with that, too? Or is it just like water off a duck's back for you? Like, whatever. well this morning I was like getting really way too excited about the stock and so I'm like I need Steven to like chill me out that's why we're here so hopefully other people can get ideas so just do you want to say what company it is you got super excited about no I really don't want to because if it's a value spotlight pick then I've already spoiled it and I've been aware of my emotions enough that like even a day or two can make a big difference about how I feel about stock but right now dude like this is sick I haven't been this excited since the last big buy that we've done so wow I'm excited now like I want to know what it is can't wait awesome so one like I'm glad you brought that up Andrew because that's the my number one rule when it comes to investing is I cannot buy a stock the same day I research it.

4:33I have to wait at least 24 hours minimum. And I abide that rule like it's life or death. Like, it doesn't matter what I'm doing, how excited I am about it. I cannot violate that rule. And that's why I have that is because like you said, like, give yourself 24 hours and okay, the funds were off now it's not it's not that shiny christmas toy you got you know on the 26th on the 25th though you couldn't pry that thing from your hands um 26 man you know you're bored and you want a new toy um at least i did but i mean what what what is it that you like walk us through like your emotional state um we'll start with getting excited like like how do you realize that that like maybe you're getting too excited about a company i don't know like i guess i start fantasizing it's like people say they buy lotto tickets so they can dream about what it would be like to be a millionaire what what did you buy what kind of car would you buy what kind of house would you buy so i just start looking at my portfolio like i'm gonna sell this and i want to sell a little bit of that and like can i trim some of this so like that that's usually a sign because if you're new here like i run a portfolio for paid subscribers and whenever i want to make a big move i have to sell other parts of the portfolio in order to make a big move so i am I just start thinking, it's just classic, like, oh, this company is going to be so much better than these companies.

6:19I know pretty well, but it's the company I don't know that well that I'm thinking that's just going to be so much better. So what is the likelihood that that's true? You're talking to me on the 23rd when I uncovered this company this morning. I think it's very, very likely. okay can i can i can i give some like context sure so you know like when stocks go through an inflection point like like a cat being one type of business and then now all of a sudden it's on a step level higher in growth because it has new growth avenues that's kind of where this business is at so it's always been you know five six seven percent growth now all of a sudden they've gone up to like 15%.

7:10They've guided for a continuation of 15%. And yet the stock is still, because this is very new, like they just released earnings in July, which is when we're recording this. So the valuation is still treating it like it's a 6 % grower. So I'm just like, it's got value, it's got dividends, it's got buybacks, it's got this inflection point and it's got 15 % growth. Like what's not to like? Like let's go. You know what I mean? But it's obviously still very freshly emotional for me. Right. No, I mean, I get it. I just like to be emotionally honest with yourself, because I know the companies you're talking about, like this is going to be bigger than at least I think I have a pretty good guess.

7:56And so, like, come on, man, like being realistic. right what is the likelihood percentage that this company will outperform those yeah like realistically like i know emotionally you're like 100 like i get that but like let's be realistic like you know there's always a chance of course but is it is it a is it a percentage that's in our favor um and that's that's where we have to stop and ask ourselves You know, like we have to be realistic during this time. And it sucks. Like, I hate that. I have to be that guy. And why did you, I was in a good mood today. You're making me be a downer, but it's good.

8:47Right. Because we can't make, um, one of the things that frustrates me the most about the culture we have, at least here in the U S, um, around money is around money because we have a lot I have made money, and I don't know. I mean, I know some of the other cultures I've lived in, money is not near the emotional state that it is for the U.S. I know some countries probably are like us, but I just hate how much of our identity almost is tied to our money. And I get it. I totally get it. We worked hard for it. and we don't want to do stupid things with it we want we want to be smart and not lose it but at the end of the day like we got to remember like it's just money anyway i'm off my soapbox now um what about on the flip side of that andrew for a company that uh you're just like i want to like it i want to be excited about it but it's just like man i'm not in love with it yeah i mean so this one I don't mind putting under the magnifying glass a little bit, but I think I've talked on the podcast before how we've been long crocs.

10:09Yeah. Probably for sure. And it's done pretty decently. Like for a long time it was down and I was like, every time I looked at that stock, I'm like, or like annoying little thing, but like it jumped back up. So it's, it's at a good profit now. And then I look at the financials and it's been flat, flat, flat, flat, plus the whole, hey dude, mess. So how do we get back to thinking? Because it's very easy to just say, you know what? I made a good chunk of money on it. And there are brighter futures just right over here. So why don't I just take that profit and go over here? I'm curious if anything comes to mind for you, because you own this stock as well.

10:54so like what kind of does anything whisper and say think about crocs is a bad example because i'm i'm okay with it

11:12um but that that's that's that's a great it is a great example though because i'm we were talking off air of why i i'm just even though i love crocs as a company why i'm so down on them and the hey dude acquisition just boggles my mind like of all things you could buy why that one like it just doesn't compute to me and i'm sure if i sat down with with their their management team and asked them these questions they would have great answers for me and they would be able to show like why they thought that was the great, the right decision at the time. Um, but I think ultimately, you know, we have to look at, and again, like it's, it's so hard to do whenever you're just like, I don't even really care.

12:07Like, like we made a profit off of it. Great. Let's move on because there's something bigger and better. and i think that is the check is that is a trap a lot of times um and you know whether it's a relationship whether it's where you live whether it's a house whether it's a car whether it's whatever bigger and better the grass is not always greener on the other side in fact it's rarely greener on the other side so um i think that that's the main check there is like am i falling into this trap of the grass is greener or is this a logical they're just not moving the way i expected them to we made a good profit great let's let's cut let's cut the bait before we start to lose again before they buy another stupid acquisition and we lose money so um i don't know like the i don't really know how you balance those two out i'm thinking of um another company that i own and i'll have thoughts about different companies and then i will sometimes write it down to to do some work on in the future and i found doing that rather than just staying negative and just saying, you know what, I'm sick of it, I'm done.

13:41Thinking of what are different ways I can learn more and see if there's a counter-argument. Going back to our episode we did recently about inverting the question, saying what are all the reasons why something could go wrong? What are all the reasons why Crocs being flat that could actually be fine for us. So when I asked the question that way, one possible answer would be, well, maybe that's just the nature of this industry. Maybe people get really excited about a shoe, go out and buy it, and then maybe they're just not excited for like three, four years. And then maybe you get another, I don't know.

14:27But that could be something I could go look into now. Okay, what's the history of this company? Is this kind of par for the course for a company like Crocs? Or have they really just, hey dude, has just spoiled the party and the rest of the company is just not executing? So that could be an idea rather than just focusing on the negative. Like, okay, well, there are some other ways to think about this. I'm not going to lie. Running a small business has been stressful lately. Swamped in paperwork, different state agencies, and got all these expenses to track and everything. And it's hard to have visibility on these things.

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17:37Download my ebook for free at stockmarketpdf.com. definitely i think and i think with crocs you know where i struggle the most where i've struggled the most with them in the past has been around the idea of okay so you made this awesome comfortable insanely ugly shoe um but it's also insanely comfortable you've created a cult-like following around this insanely ugly shoe um to include myself um you know how do you innovate past this insanely ugly shoe because you can't you know there is not the iphone like you can't just make minor tweaks to it and people keep buying it um so i mean that that's an area i struggle with And I think Hey Dude was part of them trying to answer that question of how do we get past the croc just being our soul.

18:43And I mean, they've done some crazy stuff, man. Like you can go find steel toe crocs for the construction worker that wants to be comfortable. You can go find a winner crocs for the person that wants to wear their crocs all seasons. I have one. Oh, yeah. yeah

19:07I'll save my judgment for off air

19:13but that is an insanely frustrating thing is like you step out into the snow and like your socks get wet because it has holes in it so I guess okay that's fair but I mean you know they've done some i've seen croc cowboy boots um like they've done some fun insane stuff but outside of just being fun insane stuff that's not really going to drive the company anywhere um so that's always been some somewhat a way i've struggled with them what kind of snaps me out of that is like they came what what are they called with the widgets not widgets the gibbets gibbets they even a stupid word like they came up with the a stupid word to go on an ugly shoe uh anyway um like that that i thought was brilliant on them like way to just upsell your customers like crazy and so i mean i remember when they first came out and we went and got one of my kids their first pair of crocs and and man like i don't remember how much the croc was but i know i doubled that and just these stupid add-ons because they wanted to customize them and that's fine but again like that that has a limit to how far it can take the company so um and honestly i don't know how to get past that mental block of and so again like for me it's not it's not emotional at all it's just okay we had it we got it they made a really dumb acquisition and hey dude um and i think i think it's it's ran its course so that's why when i say like i'm okay with selling it because yeah i don't see a whole lot of upside to keeping it anymore and i could totally be wrong and I am the first to admit it.

21:35I'm still doing, by the way, recently a podcast just released about Oh, Good Grief Chili's. I'm still doing my research into that. Well, that'll be in an episode here in a couple of weeks. But I am confident at this point in saying the margarita is not the reason they're doing so well. um but i don't want to spoil anything just just you know a little a little teaser they're dangling it out there um but i don't feel like an apology is going to be coming for me anytime soon like i promised it would anyway i digress um i don't know andrew like i i don't know if i'm just being negative i don't feel like i'm being negative but again like you know you were talking you don't feel like you're being like ultra positive either talking about the like you truly believe what you're saying so like how do we how do we debunk our own mindsets even if we're like it's completely illogical yeah i think time heals lots of wounds right so it being one of those things and that's kind of the fun you could call it fun or you could call it frustration but just this idea that um investing, picking stocks is one of those pursuits you come back to over and over again and over longer time periods.

23:01So it's just weird. I have some stocks that I'm trying to get better with it because I realized that for a few years, I was only selling stocks that were down, which is also a terrible idea because all you're doing is locking in losses. But the logic behind that is that you're selling the losers, and so you're getting the worst-performing companies on your portfolio. And there's a lot of truth to that. Where am I going with this? Some stocks I have, I think about selling them a lot more often than other stocks. I'm almost like, you know what? I'm not even going to think about selling them. I think it's healthy to consider that question, do I sell this stock now?

23:48but then the problem with it is stocks will just surprise you like that's the whole point that's why we build portfolios because we really don't always know which stock is going to do what I was really heavily influenced by this book 100 Baggers by Christopher Mayer and there's this concept of the coffee can portfolio have we talked about that recently? No. Okay. So husband and wife, right? The husband talks to his financial advisor. I think this is a true story, by the way. He's talking with his financial advisor every week, every month, whenever. They're managing this portfolio, right? like selling when the things look bad, buying great businesses.

24:36The wife looks at what the husband's buying and she buys the same stocks, but then rather than doing all the massaging, she just buys and throws them in the coffee pot, like takes the shares and throws them in the coffee can. They look at when they pass away and do the inheritance or whatever it is. She outperforms him by a wide margin. Same stocks. he's the one doing all the work, talking to this financial advisor. She does better than him. And it's because you'll get companies that just come out of nowhere. And I don't know, I should have looked it up before we recorded. I didn't realize I was going to be talking about coffee cans today.

25:22But there's just examples of companies that will spin off and then become a 100 bagger or like a Berkshire Hathaway. So these stocks where on the surface, it just doesn't look like it's going to be a spectacular thing. But over a very long time period, these stocks surprise and perform way better than people expected. And those are usually the biggest winners, right? So when we think about which stocks do I sell, what am I going to do with this stock or that stock? Um, having a default mode of I'm, I'm, I'm not going to do anything is better than having this default mode of I need to do something now.

26:10Like we need to come from a place of I'm probably not going to do anything, but I'm going to entertain the thought rather than coming from a place of like, I got to do this now. And then I need some like smack in the face to force me to not take action. We need to be more on the inactive side if we want to find success. I mean, inaction in and of itself is still action because you're making the conscious choice to not do something. And I think where that becomes wise is when it is the conscious. Like we're not letting fear or something like that be the motivational driver. Or instead, it's a logical, conscious decision of, I'm just going to sit on this and see what happens for a while.

27:01And that is a very valid decision that can be made. I was just thinking about this while you were talking. And this is probably the dumbest thing that I will ever say on this podcast. So be ready. Because I was thinking about it. How do I fix this in myself? and it's like you know what i'm gonna do i'm gonna go back to like the high school or the middle school even um should i ask this girl out or not pro con list like i don't know if you ever did that in middle school i did definitely um you know trying to maximize my chances for like the girl to say yes or whatever i don't know why i did it but i did it so like building like should i sell crocs like and not only just crocs but like making this like a monthly regimen where i go through my portfolio and for each stock just kind of do like a pro cons checklist like and eventually i think i can like normalize it to where it's the same questions over so i can do it rather quickly um but getting these answers of you know is this stock starting to stagnate or whatever so that basically what i'm saying is like cutting out the emotion before it even becomes an emotion basically because i i think like that's a way i could identify it i don't know like what do you think like i've like this is literally me like thinking i know y 'all probably can smell the smoke even though this is coming out a couple weeks after we record it but you know smoke lingers what can i say um but literally like the i don't know andrew what do you think is that something I should do?

28:52It sounds like you're being proactive instead of reactive. So in a reactive state, maybe you get more emotional. If you're proactive about it, like you said, you're still going to feel the emotion. But if it's part of a regimented system, I can see that playing out potentially better. I mean, you'll still feel the emotion, but maybe you feel it in a different way. Maybe you even get used to feeling that emotion a lot more often. I don't know. Is that something you'd be comfortable doing on air next month? Like building it or like build it and then go through it after I've built it? Yeah. Yeah, I can.

29:31I can. You'll be a guinea pig. Yeah. If it blows up, it's just on you and we can all just laugh. Yeah. Yeah. You know, well, I mean, it is what it is. Like I said, it's probably the dumbest idea. I like it though. No, I like it. and that's how that's just how my brain works like i like i didn't before this episode i didn't even really view what we're talking about as a problem um and because i am not as emotional as most people are when it comes to money and things like that um Um, so I'm not saying I'm not, I'm just not, I've seen people way worse than me, um, when it comes to stuff like that.

30:19And I think the average American would probably be more emotional with their money than I am. Um, but then like listening to you talk, I've realized like, I definitely, my indifference sometimes is my own worst enemy too. and so and that indifference could be explained as emotion as well so um that got me to thinking like i i need to like you said i need to be proactive about this because i don't want this to hurt me in the long run so like yeah it was just literally just me trying to think like how do I defeat this monster before it even becomes a monster? Yeah. I don't know. I feel really embarrassed now.

31:11Oh, this is good. What do you mean you're indifferent? And why would that be bad?

31:22So, I'll give you two examples. One...

31:31you know, you bring up selling crock and I'm like, whatever, don't care. Um, you know, completely indifferent about it. There's no emotion behind it whatsoever. It just, man, it is what it is. Um, the other example on the flip side is Casey's cause you sold Casey's and I didn't again, the, there was no, I was completely indifferent about it. I didn't sell it because I disagreed with you on why you were selling it.

32:06But tomorrow, if it's like, oh, I need to sell Casey's, I don't care. I'm indifferent. But again, I think that can be just as dangerous as being overly pumped or not about a company because then like that indifference will make, I feel like that indifference is going to make me blind to the potential of a company being a hundred bagger. So like just to take Crocs as an example, if you had a little bit more of like Crocs, maybe you bought the jersey and you wore it every time Logic told you to sell it, then it's almost like you've foolishly hang on to something that could be a hundred X. So like sometimes you have to hang on to a stock when logic is screaming not to, in order to get a really big winner like that.

33:04Yeah. I think so. Yeah. I think so. Because like, like, um, you know, what was it? Geico or was it Coke? I can't remember. Warren Buffett talks about a stock that he regretted trimming a lot. And I think it was Geico. I could be wrong. Yeah. So we all have those, I'm sure in the moment when he trimmed that, because I believe he trimmed a very large portion of the stock. And so I'm sure if you talk to him in the moment, it was super logical. It made total sense what he was doing. and you couldn't even argue with it. Like, you're like, oh yeah, like, yeah, sell it, trim it. Do you, do you, boo-boo.