Stockdale Paradox: Realist vs Optimist vs Pessimist

The law of karma is the law of cause and effect. Effect is determined by the nature of the cause.  So the result of action is determined by the nature of action. Action is only an extension to the thought processes of the mind. Therefore action is determined by the nature of your thought. The nature of your thought is determined by your mental tendencies. Mental tendencies and impressions condition your perspective and attitude, and hence colour your thought accordingly. Those who are not attentive, and do not see the need to observe, ponder and enquire into the value of their own mental projections, will inadvertently drift into actions devoid of discernment and understanding of reality. 

Yogi Rakesh

For most of us, the law of karma simply means “do good and experience good results” or “do bad and experience bad results”. We tend to think the word “do” as an external action performed by us. What most of us are unaware of, including I initially, is that the law of karma starts from the mind, in the form of a thought.

As explained by Yogi Rakesh in his Vedic classes, there are deeper layers and understanding of this law. However, for the sake of this post, I’ll simplify it as the following “thought leads to action and action leads to the fruit of action (the effect or consequences of our action)”. The point here is that it starts with our minds.

Discerned and reasoned thoughts leads to actions that are more appropriate to the situation. And thoughtful actions lead to better outcomes.

And with this understanding, I’ll introduce Stockdale Paradox. For a detail explanation of this paradox, please refer here. An interesting read and insight on human behaviour. If I were to summarize this paradox, then it will be along the following lines “be a realist, hope for the best but prepare for the worst”.

Stockdale Paradox

In Malaysia, we are currently on the fourth day of “Movement Restriction” directed by the Government. As most experts will say, this is a strategy to flatten the curve, preventing overload of positive coronavirus patients admitted to the hospitals at the same time.

Mentally, there are three ways to deal with this scenario. We can choose to be either pessimistic, optimistic or realistic. The pessimists are those I consider who believe this is the end and they act as if we are going through an apocalypse. To be fair, I have read some good arguments about why we should panic but stocking up one month’s worth of essential items with little consideration of others is just plain selfish.

Then we have the optimists. At this point, I’m not sure if these people believe they are immune to the virus, ignorant or playing dumb. This group of people still think it is OK for them to move around freely. They fail to understand the restriction is not only to prevent us from catching the virus, but it is also to prevent us from passing the virus to vulnerable people. Reality will kick in if and when they are infected.

And finally, we have the realist. Reports are now emerging that 70% to 80% of the world population will eventually be infected by this virus. Chances are we are already infected or bound to be infected sooner or later. So how will a realist deal with this information? Well, as Stockdale Paradox goes “hope for the best but prepare for the worst”.

Applying Stockdale Paradox to Investments

When it comes to investments, there will be good days (bull market) and there will be bad days (bear market). This is the reality of any investment. To earn a return, we must take some risks. If there is no risk, there is no return.

If an investor is pessimistic most of the time, he or she will miss the opportunity to invest and earn during a bull market run. On the other hand, if an investor is optimistic, he or she is sure to panic during a bear market.  

I say, be a realist when it comes to investment. Expect both the good and bad days. Prepare your mind for both events. Don’t be too greedy during a market uptrend and don’t panic during a market downtrend. Always fall back to your investment objective and strategy and stick to it for the long term.

The Current Market

Looking at what we are going through globally now, I honestly believe our investments should be least of our concern. The whole world economy is close to a standstill due to this pandemic. With unhealthy citizens and when businesses are forced to close (for good reason), I doubt we can expect much from our investments.  

To give some context below is one of my “unrealized” equities investment return for the past one month.

DATEUNREALIZED PROFIT/LOSS
21st Feb 2020+ve RM10K
20th Mar 2020-ve RM28K

That is a swing close to around RM38K into the negative territory in a month! I’m not alone in this. Even our local sovereign funds such as Employees Provident Fund (EPF) are now experiencing paper loss from their equity’s investment. Please refer here and here. Even some of the other known investment instruments that may correlate negatively against equities, such as bonds or safe-haven gold are experiencing a drop-in price.

I’m merely stating the fact and the reality we find ourselves in. In my view, the only way to recover this loss is to ensure we remain safe and healthy. For this to happen, everyone including you and I, need to take responsibility and survive this pandemic. Only then the economy can be revived, businesses can start to operate, and people are allowed to earn and spend again.

How I’m Preparing?

I’m not writing this post as if I’m immune to these events and elevating above everyone else. In fact, I’m taking this opportunity to write as a reminder on how I should think, behave and act during these testing times. I must be realistic.

Regarding Coronavirus:

If I were to get it, so be it. It is out of my control. I’ll face it, I’ll go through it and I hope to recover. But hope alone is not enough, I’ll need to prepare for the worst too, not only for me but for the people around me. Therefore, during this quarantine period, I should concentrate on things that are within my control, mainly my mental health and physical health by practicing social distancing, good hygiene, eating healthy, have enough sleep and exercise.

Regarding Investments:

My thoughts are best summarized in the below tweets.

Remember, it all starts with a discerned and reasoned thought. Be a realist, hope for the best but prepare for the worst. Do have a realistic view of your current predicament.