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In the previous section, you learned several keys to creating a financial strategy that you can stick to long-term. But in an ever-fluctuating market, how do you handle the inevitable bad times? Housel shares three lessons to help you evaluate bad news appropriately: Don’t be put off by either uncertainty or pessimism and remember that even if you fail frequently, you can still succeed.
In Chapter 15, Housel shares one key to reacting well to bad news: Don’t be put off by uncertainty. He argues that in order to achieve long-term investing success, you must accept that you’ll feel uncertainty as the market fluctuates. Otherwise, you won’t be able to endure the uncertainty long enough to let your returns compound.
Housel explains that investing inherently includes some measure of uncertainty—and the higher the potential gain, the more uncertainty you feel. For example, the longer you let your stocks compound, the more money you can gain, but the longer you have to feel the uncertainty of not knowing exactly what will happen to your money. Conversely, if you hold low-value bonds, you won’t accrue much value—but since bonds are far less volatile than stocks, you won’t feel much uncertainty, either.
(Shortform note: Housel assumes that this uncertainty or discomfort is inevitable when investing—and while some discomfort may be normal, constant discomfort is not. Several experts recommend strategies to decrease the anxiety you feel around your investments, like checking them once a quarter at most.)
According to Housel, most people try to limit the uncertainty they experience by timing the market—but since timing the market is impossible, they end up losing money. As an example, Housel points to the fact that tactical mutual funds, which bounce between stocks and bonds in an attempt to strategically avoid market risk, generally do worse than more traditional stock-bond funds that stick to steady investments regardless of market fluctuations. In other words, nobody can successfully time the market—not even professionals.
(Shortform note: Ironically, in The Intelligent Investor, Graham **suggests that some people time the market not due to fear of uncertainty but due to overconfidence: They have an arrogant presumption that if you’re smart enough, you can predict how the market will move.)
Therefore, Housel recommends, instead of trying to avoid uncertainty, accept that uncertainty is inevitable when investing. Remind yourself that you’re trading your short-term peace of mind for potential long-term investing success, and use that knowledge to endure the market long enough to let your returns compound.
(Shortform note: In his book, Housel focuses exclusively on the toll that investing in the stock market takes on your peace of mind. But in the blog post he based the book on, Housel discusses other financial areas as well, arguing that every financial reward you achieve takes a toll on some aspect of your life, and you can only achieve the reward if you accept each of those tolls. For example, you may patent an invention that earns you millions—but you can only develop that invention by accepting the toll working on it takes on your social life.)
Just as you shouldn’t be put off by uncertainty, in Chapter 17, Housel suggests, don’t be put off by pessimism.
Housel explains that we’re likely to believe financial pessimists because they tend to sound smarter and more reasonable than optimists. However, Housel contends, this is a mistake: Given our world’s history of long-term growth, the optimistic viewpoint is generally more reasonable than the pessimistic. Therefore, he argues, you must be able to evaluate financial pessimism appropriately so you don’t overreact when you encounter it.
To react appropriately to financial pessimism, Housel argues, you must understand why it’s so tempting. Housel explains that, while pessimism in general is alluring partly due to our instinct to prioritize threats over opportunities, financial pessimism in particular seems especially reasonable for three main reasons.