Just some Sunday afternoon thoughts that popped into my head as I read @morganhousel’s fantastic book The Psychology of Money.

It really helps to minimize any feelings of regret when investing in stocks. We are working with an uncertain future and arguably a completely random...

ST future when working with changes in stock prices based on little more than human emotion/sentiment. Its normal to feel regret if buying a stock and it quickly falls, selling and it quickly rises, or looking at a stock perform exceptionally well and have feelings of missing out

What has happened in the past means nothing except that it provides info to help build expectations for the future. It doesn’t matter if a stock is up 5x or 10x. If the future is still attractive based on your analysis get on board.

Similarly, don’t hold on to a stock just bc it’s done well historically if the LT outlook is less attractive. The price you paid for a stock means nothing, all that matter are its future returns from today’s price. Everything in investing (and in life) is about opportunity costs.

A helpful exercise I use for when I sell a stock and it quickly goes up is ask myself, “if the stock declined back to the price I sold, would I want to buy it back?” Similarly if I buy a stock and it quickly falls, “would I want to sell the stock at my original purchase price?”

For any current or potential investment I ask, all else being equal, “how would I feel if the stock declined 50%?” If my stomach turns then I probably do not have enough conviction or understand the opportunity well enough, aka Mr. Market still has an edge over my thesis.

Alternatively I ask, all else being equal, “how would I feel if the stock doubled?” If I would want to sell, it probably means the opportunity is not overly attractive. Since we’re looking for LT investments, a double over at least 10 yrs wouldn’t be overly exciting.

There’s obviously a lot more that goes into analyzing a potential investment decision. These questions are just quick rules of thumb to gauge conviction levels. It just helps to understand that what a stock does following any action is completely random.

Once I realized short term stock price movements are unknowable, therefore do not reflect whether the original buy/sell decision was right or wrong, the investment process became much more enjoyable and focused.

Focusing on the LT drivers of return, while still an exercise of weighted probabilities, is at least more calculable than random ST price movements. Don’t let ST price influence you’re thinking except when offering an opportunity to take advantage of them at their extremes.