A Brief Philosophy on Life

Re-reading my title for this post, I'm thinking that it would be impossible to come up with a more ridiculously all-encompassing headline.  Why not just call it "Everything" or "The Answer"...?

The inspiration for this post came from a gift from our friends at First Trinitarian Congregational Church in Scituate, Massachusetts, soon before we moved to the Cleveland area last December.

My fellow choir members gave us a plaque that now hangs in our kitchen and reads: "Cherish Yesterday. Dream Tomorrow. Live Today."

 Source: Me and my iPhone, about ten minutes ago

Source: Me and my iPhone, about ten minutes ago

I have a deep connection to this message and I think about it often.  I've moved many times over my life, and I've always loved thinking back to good friends and good memories from each of those places.  Growing up, I often had my head in the clouds, imagining some future experience and how I would enjoy the journey.  In recent years I've discovered mindfulness meditation and have appreciated the people and things around me more than ever.

 Lots of moves, folks.....  Source: Google Maps

Lots of moves, folks.....  Source: Google Maps

Last night I looked at the sign and immediately started to find perfect parallels in my passions of flying and investing.

Over the next week, I'll be taking each of these ideas- learning from the past, planning for the future, and learning from the present- and relating them to flying an airplane, investing with purpose, and living a life of fulfillment.

First, the rear-view mirror.

"Learn From the Past"

It's difficult to see how far you've come if you don't have a good starting point.  For me, life has provided many twists and turns on the way from studying music and psychology in college to arriving at where I am today.

One of my favorite examples is running cross country in high school.  I only ran my junior and senior years.  I was not the fastest person on the team.  I got hurt all the time.  But by the end of my senior year, I had started on the varsity team and earned my letter.  Most importantly, I could track my improvement over time which made the final achievement that much sweeter.

 Source: Pixabay

Source: Pixabay

How do we learn from the past in aviation?  One of the most important yet macabre routines of a student pilot is to review accident reports.  You actually study plane crashes because about 80% of crashes are due to human error.  It's often said, "There are old pilots, and there are bold pilots, but there are no old, bold pilots."  By learning from other pilots' mistakes, you can hope to avoid them in your own flying.  

With stock charts, I used to look at relative strength as a simple ratio.  Just the stock price divided by the benchmark.  By analyzing the movement of the line over time, you could visually identify when the stock had outperformed or underperformed the market.

When a stock doesn’t do what you expect it to do, sell it.
— Justin Mamis

I recently started normalizing the relative strength line so it also shows the relative percentage return between the two assets.  It gives the same information visually, but now I'm able to compare ten different stock charts and use the value to make an apples-to-apples comparison across stocks and sectors.

For example, here is Verizon Communications (VZ) for the last one year.  The bottom panel shows the relative strength of VZ vs. the S&P 500.  You can see the final value is 18, meaning VZ has underperformed the SPX by about 18% year-to-date.

 Source: Optuma

Source: Optuma

Another important way to learn from the past is the "post-mortem" exercise, something I think many investors avoid.  Basically, you look at some of your worst trades and attempt to answer the question, "What went wrong here?"  

Was your entry point the correct one based on your process?  Many behavioral biases tend to cloud the picture when we go to buy a stock.  For example, confirmation bias helps us justify taking a position even though an unbiased look at the evidence would prevent us from doing so.

Sometimes you stick to your buying discipline but the market just moves against you.  This is an opportunity to review your exit strategy.  At what point did you realize you needed to get out?  Did you use an appropriate stop loss strategy?  This is an area where biases like the endowment effect ("I can't sell this stock- it's my baby!") prevent us from selling before the losses really rack up.  As Justin Mamis once said, "When a stock doesn't do what you expect it to do, sell it."

Remember that by looking back and reviewing where we've been, we set a context for the present and set a course for the future.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only, and should not be construed as financial advice.  Please see the Disclaimer page for full details.