Hey, I get it—stock market declines are terrifying.
And it’s not just your imagination: losses actually do hurt more than gains feel good. Research shows the pain of losses is approximately twice as powerful as the pleasure from equivalent gains.
When Your Brain Betrays Your Portfolio
During market drawdowns, something primitive happens inside your head. Your amygdala — that almond-shaped tissue at the base of your brain — stages a hostile takeover of your prefrontal cortex, the region responsible for rational thinking.
This is a disaster for investors.
Why?
Because in investing, we’re getting paid for the quality of our decisions.
And it doesn’t matter if you have a genius-level IQ when this primal reaction takes control — your decisions during panic mode will almost certainly damage your portfolio.
As Warren Buffett wisely puts it: “If you’ve got 160 IQ, sell 30 points to somebody else because you won’t need it in investing. What you do need is the right temperament.”
During drawdowns, investors’ temperament, not their intelligence, causes the most damage to their portfolios.
We can’t rewire our neural circuitry. After all, this primal response keeps us alive in genuinely dangerous situations—avoiding dark alleys or running from predators.
But what we can control are the triggers.
Preparation Beats Prediction
Late last year, I wrote about cashing in some of my gains in the stock market for the following reasons (LINK):
“A key philosophy of Steady Compounding is that I don’t invest money I would need for the next five years.
The rationale is simple: the last thing you want is to be forced to liquidate your portfolio during a market drawdown when everything is cheap.
While it’s intoxicating to watch my portfolio make new all-time highs and ride the market’s momentum, it’s just as important to stay grounded and follow my investment principles — even when it means going against the grain.”
I want to be crystal clear about three things:
- This wasn’t a prediction that a crash was coming
- I wasn’t raising cash to “buy the dip” later
- I fully expected whatever I sold would likely be worth more in the future
The cash went straight into Singapore Savings Bonds to cover my anticipated expenses for the next five years.
This doesn’t sound as sexy as the experts on CNBC calling for crashes, or the engagement bait on social media from people who magically time every market move perfectly.
But it works.
It works because it protects my decision-making. And in investing, you’re nothing without quality decisions.
My Market Drawdown Playbook
So what am I going to do during this drawdown?
We’re not officially in correction territory yet, although the media definitely makes it sound worse than it is.
Doing absolutely nothing is a perfectly valid strategy.
But there are quality businesses I’ve been watching — those perpetually expensive great companies — are finally coming down to more reasonable prices.
I love broad market drawdowns, especially when paired with short-term business challenges. A single speed bump usually isn’t enough to make truly great businesses cheap. We typically need a perfect storm to drive prices into the truly attractive zone.
It typically takes a combination of:
- Missed earnings expectations
- Sudden “discovery” of competitive threats
- A backdrop of macroeconomic fears (trade wars, geopolitical tensions, inflation)
When that perfect storm happens, I start going up the quality curve, taking advantage of the opportunity to upgrade my portfolio by selling some names and buying these higher-quality stocks opportunistically.
My Rules for Selling
When selling, as I wrote in an earlier article (LINK), these are the rules I follow:
“My sell decisions take into account position sizing, the future of the company’s growth runway and economic moat, and its current valuation.
A common trap in selling is the sunk cost fallacy — getting attached to the price you initially paid. This major mental hurdle causes many to compound bad investing decisions.
Overcoming this bias requires a disciplined and objective assessment of a company’s future prospects, devoid of emotional attachment. I don’t care if a stock has run up a lot or is in the red; what I care about is the future — the strength of the business and the expected returns.”
It’s always about the future.
This is not a decision I take lightly; it requires extensive research and reflection. While it’s still early, I will share my private notes and thesis with Steady Compounding Insider Stocks members if I make any moves in the coming weeks and if there are any interesting developments.
Protecting Your Decision-Making
Until then, don’t watch too much news. They specifically prey on your amygdala for eyeballs by always making it sound like the world is ending.
And don’t check your brokerage account daily. Flashing prices are a call to action and increase the likelihood of making emotionally-driven decisions rather than rational ones.
Remember, you don’t need to be geniuses in order to be a good investor, but you certainly need to be one who can maintain their decision-making quality when everyone else is losing their heads.
What steps are you taking to protect your decision-making during market turbulence?
Compound steadily,
Thomas