How To Control Your Anxiety When Caught In A Value Trap

I believe many contrarian investors suffer in silence when contemplating the sale of a favorite stock that has fallen in value. It’s hard to find a value investor that does not subscribe to Warren Buffets theory that Mr. Market is crazy. For value investors falling stock prices are only to be taken advantage of and cutting losses is a fool’s game.
 
Unfortunately, the contrarian’s subconscious brain does not have the same affection for Warren Buffet. As the losses pile up anxiety rises despite all you have read and believe is true.
 
The anxiety rises because deep down in the contrarian’s brain, he knows that Mr. Market may be right. That the valuation you assigned to a stock may be wrong. That lower prices may not be for buying but for selling. That Mr. Market may be sending you signals to stop out and reenter later when circumstances may be clearer.
 
I understand your anxiety, I suffered from it also when I began my career. Contrarians believe they have to be more disciplined and mentally strong to buy stocks that are hated by others. Going against the herd is hard. It often takes tremendous courage to buy value stocks. The idea of a cutting a loss based on a stock price after doing so much fundamental research seems like heresy.   
 
However, as your losses get larger the anxiety gets stronger. Most contrarians react by trying to eliminate the voice telling them that Mr. Market may be right. Instead, you hunker down and do more research. It’s time to build more valuation models and call the company once again. All in a desire to prove that you are right.  
 
If you’re a professional in the money management business, this anxiety may be especially acute as you’re supposed to be a pro. A competent business analyst that can predict events the general public cannot. Unfortunately for you, the more education and valuation spreadsheets you complete, the more severe the anxiety gets. This anxiety also effects the individual contrarian investor. No matter how much or little money you have.
 
Value investors believe that enduring pain is part of the process of making money. However, Wall Street is filled with failed value-oriented hedge funds because they subscribed to this theory. It never entered their minds that it may make sense to use a stop loss or some technical analysis to help time exits and entries.
 
Ok Bruce, What’s the Alternative?
 
Contrarians cling to Warren Buffets belief that using technical analysis is “voodoo.” That there is no way to avoid pain or use the signals that may be coming from lower prices.  
 
I think it’s important for you to remember that you will never be Warren Buffett. You are a mere mortal and that if your right 60% to 70% of the time you are a god! Consider the fact that the greatest venture capitalist and private equity funds generate the majority of their returns from just 5% to 10% of their Investments. Why do you expect yourself to be any different?
 
The anxiety you are experiencing from wanting to be right, refusing to stop out will not go away by reading more self-help books, going to therapy or becoming a better analyst.  
 
The anxiety only leaves when you give up the belief that you can figure it all out. That you are stronger than other investors and better able to endure pain. The anxiety leaves when you admit you are fallible and willing to stop out of an investment even though you entered it with the highest conviction. The anxiety leaves when you give some respect to Mr. Market.   
 
Many investors at first refuse to do this until they have lost a substantial part of their money. Its only at this time when they realize the market is bigger and wiser than they are.
 
There are no easy answers but I would suggest your first step to controlling this anxiety is to start incorporating some basic technical analysis into your value investing. This will help you time your entry, stop losses and reentry into positions. 
 
This second step is to allow yourself to appreciate traders such as Paul Tudor Jones or George Soros who consider Mr. Market to be a god and not the idiot Warren Buffet considers him to be. Consider reading a biography of George Soros or reading Market Wizards.
 
The third step Is to print out and study the charts for stocks where you lost over 40% and stocks that you sold and then watched rise dramatically without you on board.
 
As you look at the charts, try to remember at what point you suffered your worst anxiety and regret. That’s where your work is. That’s where you should look to employ some simple technical analysis or portfolio management skills to help you avoid the same mistakes again.
 
We humans often repeat the same mistakes over and over again. This is known as Freud’s repetition compulsion. You may not have known the name but you probably know the pattern very well.
 
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