Are You a Bad Loser?
by The Algonquin Team, Algonquin Capital
āI hate to lose more than I like to win.ā
Larry Bird
If you were watching your stock portfolio closely last month, you were reminded of just how much losing hurts. Behavioural economists postulate that the pain from loss is twice the joy of gain. While the magnitude can vary between individuals and situations, it seems fair to conclude that losing sucks.
The danger of this pain is that our emotions can take over. So rather than join the āchicken littleā parade and rehash all the negative news, we thought it more useful to remind our readers of a couple of the psychological pitfalls associated with losses.
By our very nature humans are averse to losing. For our survival this makes sense. It is more prudent to be aware of threats than opportunities, to protect what one has than take risks to gain more. This feeling is accentuated by the recent sting of falling markets. This can lead us to passing up on opportunities with attractive risk/return profiles, as we overemphasize the prospects of further loss.
On the flip side, losses can make some of us more aggressive in taking risk. Consider the following two scenarios:
- Receive $900 for sure OR take a 90% chance to get $1000 and 10% chance of getting nothing
- Lose $900 for sure OR take a 90% chance to lose $1000 and 10% chance of losing nothing
Despite being mathematically equivalent, most people would take the $900 in the first scenario but gamble in the second. This is because when presented with the opportunity to recoup our losses, we become inclined to take risks that would otherwise be unacceptable to us.
The simple point is that our emotions can sway us to the extremes of becoming overly loss averse or aggressive, to miss opportunities or go chasing them. The important thing is to recognize these influences within ourselves. As whether markets go up or down, it is better to proceed rationally rather than emotionally.
The Fund
When we launched our fund last February, we could not have guessed how strange the journey would be. After three or four months of robust credit markets, things got ugly. For the last half of 2015, credit spreads steadily widened, especially punishing anyone who dared to own 30 year corporate debt.
With equities dropping 10% in the first two weeks of 2016, the trend to wider credit spreads continued unabated. The Fundās gain in January can be attributed to continuing our December strategy of holding very short dated securities and capitalizing on a few active trades.
After avoiding the oil sector for most of last year, the recent dip in crude and the ensuing carnage in the bonds of many Canadian investment grade issuers means we will re-evaluate the risk/reward trade-off in these securities.
Copyright Ā© Algonquin Capital
