I have realized
that in a lot of cases the percentage of mental capital allocated to each position
does not match with the allocation of financial capital. On the contrary, some
of my top position have needed the least amount of mental energy on an ongoing
basis and caused the least amount of stress. This has been mainly due to the quality
of the business and management.
On the other
hand, some of the smaller positions in my portfolio have resulted in a much
higher allocation of mental capital and that could be also the reason why I
never raised the size of these positions.
Not a
mathematical exercise
Unlike the
amount of financial capital, one cannot calculate the percentage of mental
capital allocated to a position. However there are several pointers one can use
to see if a particular company is taking a dis-proportionate amount of your
mental energy- You are regularly surprised by the quarterly results
- The management makes your stomach churn and causes you to worry about the safety of your capital
- The industry is undergoing a substantial amount of change and you have no means of evaluating the economics of the business even for the short to medium term
- You keep coming up with new reasons to hold on to your position, even after your original thesis has been invalidated. The word ‘hope’ keeps coming up in your thinking
- You ‘worry’ about the position for any of the above or other reasons
The killer
combination
If the financial
and mental capital allocated to a position is too high, then we have a deadly
combination. This is kind of an extreme situation can make you act irrationally
and in the end be injurious to both your financial and mental health, if the
position turns against you.
I have realized
over time, unlike financial capital which can compound, mental capital is
limited and does not increase much beyond a limit. It is important to use it smartly both for
your financial and mental health and finally for your quality of life.
A certain level
of mental capital has to be invested when investing directly in stocks (instead
of an index or mutual fund), but in some cases the level can go much beyond the
amount of financial capital allocated to it. In such cases, I have usually
found that selling down or completely exiting the position has freed up my mind
to look for new ideas and devote more time to other stocks in the portfolio.
The tail
(portfolio) should never wag the dog (your life).
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Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.
3 comments:
I think Mental Capital also depend upon how much conviction one has about a stock. If the stock is going down and one is asking many people to understand why the price is plunging, it adds to existing mental capital. More often than not, mental capital is needed when the prices are falling, and you doubt your convictions again and again.
Parag
Interesting point....so true!!
Yep..important to act upon it since we have limited focus/energy in life, must be used wisely :-)
Fantastic. You said something unwritten, an experience.
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