Thursday, September 15, 2022

Respect reality

I think the hallmark of a good life is accepting reality.

The practice is simple to understand but challenging to implement.

We tend not to see things as they are. We instead see things as we are. Every individual has a unique background that creates a different experience of an objective reality.

You can't bargain with reality. So you either align with it and be at peace, or deny it and go through a version of the five stages of grief.

In investing, the ultimate reality is price. A lot of intellectual firepower is spent on determining the right price, but nothing and no one can argue with the actual price.

It is emotionally heavy and intellectually humbling to abandon a declining stock you own and have spent much effort researching. 

Disasters happen when you reject the reality of price and insist on your effort paying off.

I read about exceptional investors buying into dips and reaping the rewards. But exceptional people are exactly that. They are the exceptions, not the rule. 

Who knows whether the exceptional would repeat their feats. Most are playing with matches while surrounded by oil barrels. They may not be burned, but it's still a stupid thing to do.

I opt for survival over exceptionalism. 

I wrote about UNIR a month ago. The stock has tumbled 50% since UNIR deregistered and went dark. 

How much risk should I reduce? I went with half and stayed with UNIR, only because there was no fundamental reason for the stock to fall (Deregistering is a technical factor, in my opinion).

I don't know how low the stock can go. A stock at all-time lows can always go lower. Reducing risk protects my downside and adds optionality. The capital can be allocated to better positions or added back to UNIR.

But the fundamental story didn't change. Why reduce risk?

Because the stock price has declined significantly since my purchase. This shows my timing was wrong. 

UNIR also didn't explain why it went dark. Reducing expenses should be the key reason, but I'm never sure. 

Proper respect for reality means protecting against detrimental unknowns. It is not essential to know what would happen. I only have to be financially invulnerable no matter what happens. 

Yet static rules should not apply to a dynamic game. I may buy into a dip. My hurdle is just very high. 

More important than the will to win is the will to survive. Runners can't beat a race with broken legs. Investors can't profit without capital.