Rule Breaker Psychology: Why It's So Hard to Hold on Through the Dips

In this Rule Breaker video, Motley Fool co-founder David Gardner shifts the focus away from the numbers game to a mental one. Picking good investments is, after all, only one part of growing your wealth -- another key aspect is maintaining the disciplined mindset and emotional distance required to avoid making the wrong moves.

As he has often pointed out, markets fall faster than they rise, but they rise more than they fall. Even knowing that, it can be truly difficult for an investor to ride out those bearish periods, and there are two key reasons why.

A full transcript follows the video.

This video was recorded on June 14, 2017.

David Gardner: Why people don't get it? Why don't we understand that? Why is that a surprise? Why does it hurt? And I have two reasons quickly to share with you.

The first is, as psychologists tell us and as I've been wont to say in the past on Rule Breaker Investing, the pain of loss is three times the joy of gain. And that's been determined out there through behavioral economics, in the marketplace, psychological testing. We, as humans, experience -- for the same win or loss -- we experience the loss much harder than the win.

That's a big reason why people don't get it. And as I reflect on many appearances on television, radio, and the media over the years, I know that the time you're most likely to see my brother Tom, or me, or another Motley Fool analyst on a general news show, over the course of history, is whenever the market is getting pounded. And at a certain point, I kind of got sick of doing these media appearances, because you wouldn't get called in -- for ABC Nightly News or something on CNN or Charlie Rose -- you wouldn't get called in on those when the market's doing well, or just kind of placidly moving up over the course of time. You're only getting called in, we would find, when the market is experiencing extreme pain, and we need to speak to that.

At a certain point I just didn't want to participate in that, because that's not the big message. That's not the big point to me, and I don't want people only to see The Motley Fool when they're feeling a lot of pain because the market has just experienced a fast drop. So we've done a lot of appearances on CNBC and Bloomberg and others, and a lot of Motley Fool analysts continue to do that today. Those are the ones that just occur when an interesting story pops up about a given company, or some other aspect of investing.

We enjoy doing those and continue to do them, but I'm just pointing out those are usually financially oriented cable channels that are just going to have us on to talk about a given company. It's when you hit the general news -- and it's when, it's always because the market's dropped -- that I get a little tired of that. So that's kind of reason No. 1 that I think people don't really get it.

Reason No. 2 -- and this is particular to Rule Breaker Investing, to you and me as Rule Breakers -- is that it hurts because in the short term, often we're going to show negative returns much more readily and easily and painfully than positive gains. If, in fact, stocks do go down faster than they go up -- and as a Rule Breaker you're paying a premium to buy into a great company -- it's much more likely in the first six months that you're going to drop 25%, in my experience, all of a sudden, than that you're suddenly going to gain 25%.

In the short term, often we're going to show some negative numbers, or at least a mix. We'll have some winners and some losers. What has to happen is we have to let time pass. We have to find these good companies, be willing to overpay for them, buying their "overvalued" stocks, and sometimes take it on the chin with that first earnings report that surprises us because, darn it, it was a good report, but why is the stock selling off? And it's because the report wasn't good enough, or the forward guidance wasn't great. And so all of a sudden, you're in the hole 18% on your shiny new Rule Breaker that you just bought. But five years or so later, since the market always goes up more than it goes down, you're going to find, quite often, that what didn't look so great that first three to six months looks quite a deal better three or five years later.

That's the nature of Rule Breaker investing, and unfortunately, as much as I like to talk about spiffy-pops and long-term winners -- and I'm going to get into that a little bit to end this episode this week -- it's not even that exciting to report on. No one's going to have us, typically, on CNBC to have us brag about how Priceline has done since we've held it over the last 10 years. It's almost a nonstory, or boring. It isn't the stuff of being a market maven and getting quoted on television these days to passively watch something gain and win over time. It just sometimes sounds like bragging. As Rule Breakers we just need to understand that in the short term, we can take it on the chin; in the long term, we're going to win if we exhibit the all-important quality of patience.

Stocks always go down faster than they go up, but they always go up more than they go down.