Do you know what is “drown-proofing”?
I have some idea.
I read about it here. And I quote:
There’s a part of Navy SEAL training called “drown-proofing” where they bind your hands behind your back, tie your feet together, and dump you into a 9-foot-deep pool.
Your job is to survive for five minutes.
Like most of SEAL training, the vast majority of cadets who attempt drown-proofing fail. Upon being tossed into the water, many of them panic and scream to be lifted back out. Some struggle until they slip underwater where they proceed to lose consciousness and have to be fished out and resuscitated. Over the years, a number of trainees have even died during the exercise.
Goodness me, that’s scary!
I don’t think I will ever gather enough courage to even try it.
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However, I think I can resonate to some extent with the emotional struggle the mind goes through when it undertakes such a task.
Why do I say so?
Because I am an investor and I have gone through similar emotions in my investing journey. And if you are reading this, odds are high that you share my struggles too.
Drown-proofing is a good stress test not only in the US Navy but also in the field of investing. If you and your portfolio can survive the drawdowns during the extreme bearish market and thrive during the bullish phase, then investing in direct stocks is your game.
“Game” is not used above in a nonchalant way. It reflects three things:
- It is fun & entertaining to engage with
- You have a decent grasp of the rules, and
- It also throws up hard problems which you enjoy & are capable to solve
You won’t cross all the levels of the game effortlessly. But you will have a decent hit rate that will keep you interested in the game. No one loves losing games. So, if you are playing a losing game in your life for too long, the option is simple. Pick up a new game.
Investing is that losing game for many. They just don’t admit it.
And these drown-proofing tests like the Covid-19 fall, demonetization, IL&FS crisis, global meltdown, dot-com bubble busts, and many others help you figure out where you stand in this game of investing.
There are two big mistakes we commit in the drown-proofing test:
- Real-time monitoring of the portfolio value
My investment portfolio, which also mirrors my clients’ portfolio, was down 60% in a month (February 23rd to March 23rd, 2020). If you were invested at that time in the market, you would have experienced something similar. Now that’s not something you see regularly. I witnessed this for the first time in my life. I have heard many horror stories of the dot-com bubble-bust and global financial crisis. They say buy when there is blood on the street. It’s one thing to say that. Completely another when you know that some of that blood is your own. And it doesn’t stop there. The media will throw up tons of data at a lightning speed and with a thunderous sound. You will end up checking your portfolio a thousand times. I find it ironic and funny at the same time. We check our portfolios most during the extremes. Irrespective of how many times we chant Warren Buffett’s quotes, Greed & Fear never really leave us.
- Try too hard to succeed
The first mistake leads us to the next and probably the most fatal mistake. We think we can do something about the fall in the portfolio. Rather, we think that we must do something about it. And that leads us to the rabbit hole with no respite in place. Our emotions take over us. We make a quick decision to fix the leaking boat. Admit it. Making a shuffle in the portfolio at such a time also gives you an intellectual high. As the stocks you buy in that shuffle are near their All-Time-Low price. And you feel you are getting a jackpot. You know what I am saying and I, therefore, stop here.
Now that we know about the two big mistakes, let’s figure out what would be a better way to approach these drown-proofing tests.
The answer lies in the strategies of the survivors of the original US Navy drown-proofing experiments. If you read about them, you will see a recurring pattern:
- They have no superhuman strength or endurance
- They are not necessarily swimming experts. Passing the drown-proofing test doesn’t need an expert’s finesse.
- They don’t fight with the natural forces; they surrender to them and use those forces to save their life.
- They intuitively understand that more than a test of physical will, it is a test of emotional self-control in situations of extreme danger.
Now let’s come back to investing and flashback to March 2020.
Don’t you think your ability to manage your own emotion was far more important than knowing about different businesses back then? They were more important than knowing which company to buy or sell. They were more important than how smart you were, what academic degrees you held, or how damn good was your last stock pick.
Surrendering to the market at times may make others think that you are accepting a defeat.
No. You are not.
Mark Manson puts it so elegantly and I quote him again:
This skill—the ability to let go of control when one wants it most—is one of the most important skills anyone can develop. And not just for SEAL training. For life.
I would just add three words to the above quote. “For investing too”
When things go berserk, not doing anything, is not stupid. It is arguably the wisest thing to do.
Reminds me of Rajiv Bajaj, the MD of Bajaj Auto:
Whenever you are in trouble. Do less. Don’t do more.
However, that’s not how we function.
We have this big ego attached to ourselves that we can’t let our portfolios drown and do nothing. We think that we must do something about it. And we don’t realize that we don’t take action because it is needed. We take action because we want to say to our monkey brain:
Hang on. I got it. I will reduce allocation here and increase allocation there and boom. There will be magic and my portfolio will swell.
The average results of such actions, barring exceptions, are often counter-productive to your portfolio returns.
Don’t get me wrong. I am not suggesting abandoning research on businesses you hold in your portfolio. A long-term investor must thoroughly research before buying stocks. And not just that. The due diligence should continue during the holding period as well. And there should be no space for a stock in the portfolio if the business is not performing as per your liking. However, during extreme bearish markets, there is a strong bias that creeps up into our minds. We take falling price as a cue for the business potential. And that’s why slowing down or even a complete stop in activity makes much more sense.
Not because we are helpless. But because we accept the imperfections of life and markets.
I am sharing the experience of the Covid-19 fall because it is still fresh in my mind. Do not get anchored only to what happened during March 2020. The covid crash lasted a month and the market recovered. Though we got to know about it only in hindsight. The next crash can last a couple of years maybe. You never know.
But the fact remains. Are you willing to trust your hard work, back your research with emotional strength, not panic, not sell your stocks and yet surrender to the market forces during that time of fear and uncertainty?
I will conclude by quoting again from the same post on drown-proofing:
And how do we do this? By letting go. By giving up. By surrendering. Not out of weakness. But out of respect that the world is beyond our grasp. By recognizing that we are fragile and limited and but temporary specks in the infinite reaches of time. You do it by relinquishing control, not because you feel powerless, but because you are powerful. Because you decide to let go of things that are beyond your control. You decide to accept that sometimes, people won’t like you, that often you will fail, that usually you have no fucking clue what you’re doing.
You lean into the fear and uncertainty, and just when you think you’re going to drown, just as you reach the bottom, it will launch you back to your salvation.
If you understand the importance of drown-proofing in investing, you would tend to agree with me on the most important thing: And that is Survival.
The bedrock of investing is Survival
Compounding depends on Survival
Investing Performance rests on Survival
Businesses get valued on the base rate of Survival
Investors like Warren Buffett are also more about Survival
Now you know what you need to do.
Survive to Thrive!
Thank you for reading!
P.S.- This is the fourth edition of Survive to Thrive. The previous editions are here, here, and here. Some of our research/work is centered around this theme of Survive to Thrive. Get a glimpse of our premium research offering MissioN SMILE to deep dive further.