Brainstorms: Focus, Patience, and Risk Premias

Mindset and Emotions Connect to Risk

In the DAO of Capital, Mark Spitznagel shares a fundamental principle on how he thinks about markets:

• A patient response to someone else's impatience or urgency. You must have disciplined control in alternating between tremendous patience and overwhelming aggression.

Now, many investors will manipulate the definitions of these terms to make themselves feel better about their decisions. For example, the perma bears will say that they are “patient” as they sit in cash for 5-7 years instead of learning how to quantify patience.

When I think about patience in markets, a lot of it comes down to HOW I am quantifying risk and reward. You can say that you are a patient person but if you don’t know the specific actions to employ around your emotional control then your patience means nothing.

This is where the idea of risk premias comes in. A risk premia is the reflection of how the market is pricing an asset in connection to the risk-free rate. When you have a view of the risk-free rate and a view of the factors creating a risk premia, then you can have a correct view of WHEN to be patient or aggressive.

Understanding this tension is key because it shows that BOTH the mental and emotional side of making decisions are important. You need to master your mind and emotions. Your mind has the intellectual ability to analyze a situation and control over your emotions allows you to have overwhelming aggression at the right time.

This is how I think about patience in markets. It is not some obscure cover for bearish or bullish narratives, it is mastery of one’s self.

Happy Thanksgiving!