Recently, we have been seeing a sell-off in the Stock Market. But specifically, we are seeing THE PAIN CENTERED in a very particular part of the markets. All the stocks, that over the last two years could not be stopped. That reached levels that were unimaginable. Well, they are all now coming back to Earth.
These are the highly unprofitable tech stocks that everyone and their best friend were talking about during the thick of the pandemic in 2020 and early 2021. However, as Howard Marks says, "Trees don't grow to the sky" and well these trees are coming back to Earth with a loud
Everyone’s favorite investor in 2020, Cathy Wood’s fund (ARKK Innovation ETF) has not been doing as hot as it did in 2020 (Returned more than 140%).
(Side note: this is not shade at Cathy because we all have bad years. ARKK is just the perfect example to use to demonstrate how bad things are right now for very particular stocks)
Seems valuations matter once again. I mean at one point Zoom ($ZM), your favorite way to zone out in meetings, was worth more than Exxon, yeah the oil company, with none of the revenue to back up the valuation.
If you own any of these stocks, first of all, I feel your pain. I own Alibaba so I am right there with you in seeing a stock just continue to drop like an anchor in the ocean. We just keep asking ourselves,
Where the HELL is the bottom?
But more importantly, this is what REAL investing feels like. It is not all sunshine and rainbows. Where any stock you buy will just go up. Here is an interesting stat for you,
According to Jason Zweig, from the bottom on March 23, 2020, 96% of all stocks in the U.S. stock market were up over the ensuing year.
Meaning, maybe you are not the second coming of Warren Buffett. Maybe we all got super lucky in 2020. It reminds me of a saying
So what do we do now?
Some of us are looking at 30-40% losses in our portfolios and wondering,
WHAT AM I SUPPOSED TO DO NOW?!
Well, I have some general advice that might help you but it will be painful. Because this moment needs to be tattooed on your brain. So you never make the same mistake again!
Moving Forward
My advice on what to do depends on a question we all need to ask ourselves. We probably should have asked ourselves this question, when we first opened our Robinhood Brokerage account in 2020. We should have asked this question before we started buying stocks. But hey, no crying over spilled milk. What is done is done. What comes next is the most important thing.
The Question to ask yourself is
Do I actually want to be a stock picker? DO I actually want to take the time to read, listen, and learn how to do this? Is this actually the way I want to spend my free time?
Depending on your answer to this question will determine your path forward. Remember there are no wrong answers. Just different choices at that particular point that we are in. Nothing is stagnant or set in concrete you can always change your answer.
YES! I want to be a Stock Picker
Congratulations on saying yes. You are now learning the most important lesson in picking stocks. As Peter Lynch says
Embrace this pain and NEVER FORGET IT!
Because as you continue investing; this will happen more often than you think. As you are trying to outperform the Stock Market by picking individual names, these massive drawdowns will continue to happen from time to time. This is where the basics of how to pick stocks come in
Buy What You Know
Meaning DO YOUR RESEARCH!
Don’t just buy something because someone recommended it or you use their services.
Learn how the company makes money.
Learn what the drivers for future growth are for the company
Learn about the risks the company faces.
Learn about the management of the company
Learn about the advantages of the company
Learn how to break down financial numbers.
Learn what the key metrics are for the company
Listen to the company on Earnings calls
Read shareholder letters of leadership’s expectations and deliverables on those expectations
As you can see there is a lot to knowing a company and understanding it. It is not just “Oh I like this thing so I buy this thing” You have to go deeper so you understand the company and you can build a conviction around that company. This leads to the next part of being a stock picker:
Buy with A Margin of Safety and Understanding Your Risk Level
A Margin of Safety gives you downside protection.
But to buy at a margin of safety, you have to understand your risk tolerance
Some of us do not need to be anywhere close to 100% Single Stocks. Most of us probably need to have a 70-30% Split in favor of ETFs that track the market.
This will help you remain rational when making long-term investment decisions because you know you will be okay no matter what.
Find your balance! Everyone will have a different investment strategy but you have to determine yours. Then make a plan and follow it. This way you know that if everything falls apart you know what to do next.
NO! I NEVER WANT THIS PAIN AGAIN!
Congratulations on being honest with yourself.
To end the pain, CUT YOUR LOSSES AND RUN!
Don’t look back! Don’t try to justify why you should hold on just a bit longer. Just end it and move on with your life. This is not what you want anyway. SO why keep punishing yourself. Move all your money into passive Index Funds or ETFs that track the total market like VOO or VTI or VXUX or something similar. Just pick one and continue buying into perpetuity.
Do not BELIEVE the Sunk Cost Fallacy. Which is
The money is already gone. Your wishful thinking that maybe the stock will just get back to where it once was is a waste of time. Remember, the stock does not know you own it. SO it does not care about your story
The longer you hold this position the more you lose out to Opportunity Costs. This is something we need to be thinking about in every investment.
Every second, minute, hour, day, week, month, quarter, year that you leave that money invested in a dwindling stock. Is time the money is not spent compounding within a boring market index fund or ETF. With less of the risk and less of the headache.
Losses are always more than what is shown on your Brokerage Account overview.
Regardless of whether you selected Yes or NO. Every single person, I believe, should ALWAYS BE LEARNING about investing, money, and FINANCES in general. Grow your toolbox, you never know when a tool might be needed in the future. You never know what opportunities might come your way.
Stocks getting crushed now may be the best thing that happens to some of us. Because it shows us that the stock market is not a game and is not cute. There are rewards but there are also RISKS in order to get those rewards. The sooner we learn this lesson the better it will be for us. Better to make a $500 mistake than a $200,000 mistake.
I personally hope we continue seeing a decline in the market. There are companies that I would love to buy more of but their valuations have been crazy. Because for me, as the Stock Market prices fall it becomes less of a risky proposition. Because as Mohnish Pahbrai says
I prefer games where the odds are stacked in my favor, not against me
Thank you for reading.🙏🏾
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