See The Big Picture
But there’s more to investment success than just finding good stocks at reasonable prices. Every time a pilot gets behind the yoke of an airplane, they have to be prepared to make hard decisions based on changes in weather or airplane mechanics.
The same is true in investing. Quite often, it turns out the market fundamentals have materially changed from when we took a position. Prudent investors trim their long positions by selling low-performing stocks, while hedging their exposure to the overall market by selling other stocks short.
But the key here is they don’t sell everything they own. Nor do they immediately go to a 100% short portfolio. Taking such action is tantamount to trying to dodge other air traffic while never communicating with a control tower. It’s a terrifying ride that might just cost you everything.
Don’t Chase Hot Stocks
Lastly, investors must learn never to chase what’s “hot.” It takes great discipline to stick with buying stocks of great businesses at reasonable prices. And it takes that same discipline to follow your position-size limits.
But when the next “great” thing comes along, many investors throw discipline out the window. They buy stocks based purely on hype. Take Facebook Inc’s (NASDAQ:FB) IPO in May 2012. The company opened at $38. Everyone was clamoring for shares.
By August, shares were trading at about $19 — a 50% decline from its IPO. And no matter how disciplined an investor you may be, it’s hard to sit through a 50% drawdown. Worse, the shares didn’t hit breakeven until August 2013 — a full 15 months later.
It was even worse for shareholders of eBay Inc (NASDAQ:EBAY). Investors that purchased shares of eBay when it was “hot” in 2004 would have experienced an 81% decline before the stock leveled off.
In both cases, investors would have been much better off to buy “hot” stocks after they’ve cooled off and are trading at reasonable prices.
Fair Weather Flying
Whenever I climb in my plane, everything possible is done to ensure a safe experience. Every trip is treated as if it were a cross-country adventure. And that same preparation is applied to my investing. And it’s kept me safe through many Wall Street storms.