Humans are a funny species. Even in the best of times, we tend to act very irrationally based on emotions. When things become challenging – e.g. during a stock market correction – then say goodbye to any left-brain logic; the emotions have taken over.
If we approach the back of the line in an airport and let’s say there are 100 people in front of us, the line feels long. But if 30 people show up and get in line behind us, all of a sudden we feel better (even if during the interim someone joined their fellow passenger from the bathroom now making us 102nd in line).
More to the point in investing, if stocks go up 50% (which they basically did in 2023 and 2024 combined), then go down 10% in the first 2 ½ months of the following year, it seems like the world is falling apart. But if stocks had instead climbed 40% steadily over that 26 ½ month period, landing in the very same spot (roughly up 40%), then our psychology – our emotional state - would be very different (part of this can be explained by the scientifically proven notion that humans feel more relative pain from losses than the joy they receive from gains).
Let’s look at the current poster child of ‘relative’ performance. TSLA is down around 50% from its recent highs (it is currently trading at $234 down from $488 about 3 months ago). That seems like a total disaster (and indeed for those who purchased the stock north of $400, they are definitely sitting on unrealized losses). But zoom out even a little bit, to less than a year ago (April 2024), and the stock is up nearly 70% - a massive return. Had the stock slowly but surely ticked up over the last 11 months from $138 to $234, it would be viewed as a wild success. But how it got to these gains – by first going up a bunch then declining – changes our perspective completely.
While we are predominantly fundamental investors here at Coastwise, we do layer in technical analysis via charting and other methods where appropriate. When it comes to looking at gains and declines of stock prices, zooming out and looking at a longer-term chart can prove very helpful. When a stock has had a huge run up, and then drops 10% or even 20%, it can look like a bargain for having dropped ‘so much’. But zoom out a bit and you can quickly see that it may still be up 100% or more in a short period of time despite the recent drop. Of course, this kind of analysis should be combined with fundamentals which ultimately matter over time.
In general, when there are material changes in a short period of time – be it positive or negative – it can be very helpful in terms of your analysis for future decision making (not to mention your emotional well-being) to zoom out your perspective into a longer time frame and/or bigger picture.
The ultimate form of ‘zooming out’ is to visualize earth as a tiny speck of dust floating within an infinite universe. This is not meant to diminish one’s own value or importance, but to reflect how most things are not as important as we think, and to treasure and value every moment. To not sweat the small stuff and have gratitude for the things that really matter – our health, our relationships, etc. (and certainly not the fact that a single stock has dropped 20% in a month after having more than doubled the previous year).