Tim Ferriss Nearly Lost All His Money During These Uncertain Times
And his story will teach you about the psychology of money.
When you think of someone like Tim Ferriss, who has spent much of his life in Silicon Valley and is surrounded by intelligent investors, you would assume during a financial crisis that he’d be the last one to make a mistake.
On Ryan Holiday’s podcast, recently, Tim admitted something that took me by surprise:
I have seen my stock portfolio drop 70% in value in certain cases.
I was able to sell a portion of my stock. Then I decided to hold the rest. That could prove to be a terrible, terrible, terrible decision. This could be the worst financial decision of my life…could be.
But after lots and lots and lots of discussion and lots of number crunching and lots of thinking about it, I decided to hold on. ….(And in this case I’m referring to Uber, that I was an early advisor to so it represents a disproportionately high percentage of my net-worth.)
But the decision making process, I felt, was reasonable.
At the time the stock [Uber] was trading around $40 price per share and I was talking to this much more experienced investor and he said:
“If you are going to hold this [Uber stock] you need to commit to yourself to hold for at least five years and you should expect that the stock will go down to $20 or $15.” Now at the time it was about $40. This seemed….far off in the distance.
He said “When it hits $20 and $15 you are going to want to sell more than you do now and you need to prepare for that.” And that’s what I did. I mentally committed to holding.
None of us are immune to our own psychology when it comes to money. Any of us can make a bad decision about our finances if we don’t prepare in advance for what is to come.
Unfortunately, my story is no different from Mr. Ferriss. I, too, nearly made some bad financial decisions. My psychology got the best of me. And that is why the lessons I learned from Tim Ferriss have helped me so much.
Here is what Tim’s story can teach you about the psychology of money and how to manage yours, so you don’t lose everything you’ve worked hard for (not financial advice).
Prepare Your Mind
I have had many struggles through this coronavirus experience — but the areas where I have not struggled are the places I have rehearsed what might happen — Tim Ferriss
Think about what it’s going to feel like when your investments take a hit. Preparing for major events like a recession can help you handle them in the future. Looking at previous recessions can show you that 30%-50% drops are not uncommon.
How are you going to feel if that happens? What could you do to prepare so you don’t freak out and sell your investments at rock bottom prices?
Knowing How to Invest Can Be a Disadvantage
With the tool kit and experience you beat yourself up by not taking advantage — Tim Ferriss
Sometimes knowing lots about money can be a disadvantage. You can start to hypothesize and overthink the entire world of finance and do your head in, in the process. That’s what Tim describes it felt like recently.
Betting on Whether It Will Go up or down Can Hurt
It turns out it’s very easy to get your face ripped off trying to short the market — Tim Ferriss
You can bet the market is going to go down because of something like a pandemic by shorting stocks (betting stocks will go down). During uncertain times, the situation can change rapidly.
The markets can be extremely volatile and that can cause unexpected losses. Unless you are a professional trader and do it for a living, it’s often best not to play the game and keep your face and finances intact.
It Matters How Many Opportunities You Take Advantage Of, Not How Many You Miss.
There are opportunities everywhere. There are endless chances to make money. Tim recommends going after the ones that exploit your core competencies and are the most appealing to you.
He argues you can miss plenty of opportunities and only take advantage of a small few and net-net still do very well. “I try to keep that in mind and zoom out. Not look at this as an anomaly of a few weeks,” says Tim.
Zoom out
Zooming out is helpful. Your financial future is not built in a few months. That is short-term thinking that will make you go broke. You invest for the long-term and you earn money over the same time period. It’s okay to make a few mistakes as long as you don’t bet all your money on one thing and diversify your portfolio.
This period in history is only a blip on a much bigger graph — remember that.
The reframing of the question, for me, relieves a lot of the stress. Instead of asking “why didn’t I take advantage of X….”
…ask “How might I look for opportunities that do not have the time-sensitivity of trying to time the stock market?”
Stick to Your Field of Expertise
Where are my strengths? Where are my weaknesses? Where do I have domain expertise?
It’s probably not going to be figuring out whether Google or Berkshire Hathaway is going to move one direction or another and how much they are going to move. That is being the sucker at the poker table.
You can act like a sucker when you think you’re smarter at investing than Warren Buffett. There are other ways to make money outside of investing.
Rushed Decisions Are a Bad Sign
If you are in a hurry, then that is a sign of desperation. Does desperation sound like a good state of mind to invest your life savings? Probably not.
If I feel rushed to make a decision…the likelihood of me making a bad decision is very high. And the cost of undoing that bad decision can be very high.
It is “we” that hit the “execute trade” button to financial ruin. Slow down.
The Markets Hurt Psychologically, Not Just Financially
Even in a bear market there are these rallies that can really hurt you, not necessarily financially, but psychologically.
Right now the volatility (meaning the amount of up and down) is just unbelievable. You’re going to get whipsawed no matter what. And that can be super stressful.
There is a cost to everything you do. Investing your money and worrying about it all the time has a psychological cost. It’s all fun and games until you play and it’s your own money. Then, stress takes away some of your brainpower that you can use to be creative.
That is a huge cost that can stop you from profiting from the hard-earned skills you love deploying. It’s worth thinking about this trade-off before becoming obsessed with the markets and your ability to invest in them.
A Simple Guide to Money in These Uncertain Times
1. It’s okay to be afraid.
It would be more worrying if you weren’t afraid of this economic collapse.
2. Make a decision and move on.
A decision is to decide and cut off from other options. Just like Tim Ferriss did with his Uber stocks, make your decision, and then move on. Otherwise, you suffer from extreme levels of regret.
3. Nothing is too big to fail.
As Tim Ferriss rightly points out, “every empire comes to a close.”
This was a stark reminder when I thought about my exposure to the US stock market and how the shift in power could change in the near future. The situation with Japan’s stock market in the 90s is a great example of this.
4. Don’t be afraid of doing nothing
Inaction can save you from ruin during tough economic times. If you’re not sure what to do with your money, do nothing for now. Sleep on it and come back to the decision tomorrow.
5. Remember why you first invested
When you first invest in a particular asset or company you normally do your research. There is a reason backed up by facts and experts that cause you to invest your money.
During the collapse of the stock market when you feel like selling everything, think about that reason. You might find your reason hasn’t changed at all and that can make you calm and stop you from doing dumb shit.
Pro tip: Take a small amount of money off the table to ease your anxiety
This advice helped me a lot and I discovered it accidentally.
One way to calm the nerves is to take a small amount of money off the table. Sell some of your stocks or pull out 10% of the money you had invested. When you use this strategy, you can calm your anxiety and feel as though you took action without completely selling everything.
Sitting on the sidelines in cash is not a bad idea. Let the financial storm pass.
It’s good to be reminded that even the smartest investors, like Tim Ferriss, who have made more money than many of us could ever dream, have the same psychological challenges we do when it comes to finances.
Thankfully, Tim didn’t make any rash decisions in the recent stock market crash and kept much of his money invested in what he believed in many years ago and still believes in today.
How much money you make is based on your psychology. Don’t let tough economic times cause you to lose your mind and all of your money.
Slow down your thoughts and decisions, get perspective, and manage your state. Your mindset is what helps you make money and keep it.
