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The Bigger Mistake

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August 01, 2008 – Comments (13)

Recently I've been encountering people who are understandably quite fed up.  After all, the housing/lending debacle has likely significantly devalued the largest single asset many of them currently, or ever will, hold.  Banks are failing.  Gas, food, and other consumer prices are rising.  Unemployment figures are up.  In my home state of California, one of the states whose residents are already among the most heavily taxed, we stand a good chance of seeing our tax bills climb due to a mammoth budget shortfall.

People's investing portfolios have been bleeding red ink for a while - and yes, this includes mine too.  It's enough to make some people want to throw in the towel.  I've even read a few CAPS blogs in recent months in which investors have declared that they are doing exactly that.

Contrary to what you might think, I'm not going to necessarily advise you not to toss in the terricloth.  I'm not even going to give you the ubiquitous, "Great companies are on sale along with everything else!" line (despite the fact that I believe it to be true).  I'm not going to tell you that it's precisely the point when many investors capitulate, or throw in the towel, that marks market bottoms.  (Though in a backhanded way I guess I just did both)

What I am going to say, at least for me, is, "I knew this job was dangerous when I took it."

Before I ever bought my first stock I knew that there would be rough markets, collapsing asset bubbles, recessions, or maybe even a full-blown depression along the way - yet I invested anyway.  I knew I'd make some bad, even really bad investment choices along the way too - yet I invested anyway.

I invested anyway because I also knew that over the long term, despite these painful periods (and historically speaking, the current one isn't nearly as bad as many others have been - at least not so far), the long-term appreciation of stocks was my best choice for building my family's retirement nest egg.

I suppose I could throw in the towel.  After all, the pain is no fun.  I mean it's one thing to intellectually know there's a strong possibility, if not inevitablility, that my portfolio would suffer losses, perhaps big ones - it's another to actually feel them.  I get it, I really do.

But then I imagine what my life would be like if every time I set a goal knowing that the journey would have moments of difficulty, perhaps extreme difficulty, I threw in the towel just when that difficulty I knew was coming actually came.

I know I would have never finished graduate school.  It wasn't always a whole lot of fun working a full-time job 5 days a week, taking classes on the other two days, and pretty much not having a day off to myself (other than maybe Thanksgiving and Christmas) for a couple of years.

I know for sure I wouldn't be married.  Talk about something one begins where one has a pretty good idea there may be some rough patches along the way!

I wouldn't be blessed with the profound joy that is our daughter, that's for sure.  The process of adopting her was one of the most difficult, challenging, frustrating, and often emotionally exhausting things I have ever done.

Sure, not everyone's story is the same (thank goodness!), but for many of us I think the things in our lives that give us the greatest sense of purpose, satisfaction, and happiness are those things that we undertake knowing full well that they not only may, but will, be quite difficult - but we do them anyway.

I don't mean to equate investing with marriage, parenting, or anything else really - or that investing should be a source of happiness in our lives.  What I do mean to do, however, is to suggest that when things get painful you may just want to ask yourself, "Did I know this job was dangerous when I took it?"

If the answer is "No!", by all means, grab that towel and toss it in!  I mean that with the utmost sincerity.  In fact, I'll even cheer you on as you do so.  After all, I can't imagine encouraging anyone to stay invested in stocks who isn't doing so with the full knowledge that not only can their portfolios lose significant value at some point along the way, but almost certainly will.

If the answer, however, is "Yes", I sure hope you won't reach for that towel.  Might staying invested in the current market, with all its troubles, be a mistake?  You bet.  But giving up on the (hopefully) long-term goal you set for yourself when you started would, in my view, likely be the much bigger one.

Regards,

Russell (a.k.a. TMFEldrehad)

 

 

13 Comments – Post Your Own

#1) On August 01, 2008 at 8:00 PM, nuf2bdangrus (< 20) wrote:

Russell,

I'm one who threw it all in, and then decided it was a mistake.  THe vhe volatility and micromanagement of my portfolio led to panic decisions.  Down35%, I have real work to do.  I know that if I stay all cash, I can't make it back.  But I also know that if I'm fully invested, I can't be prepared for an opportunity.  So have parked a third of my remaining portfolio in cash at 3%, and have the rest (except a big trading mistake read HOLX) in a series of small deep in the $ call options.

 

I have learned, with a third less cash that investing is several factors.  Understanding marco trends, which I do well.  Secodnly, identifying companies well positioned for those trends.  I can do that well. Diversification, which I didn't do enough.  Here are the two hard ones.   Understanding what the most unusual economy in 100 years is going to do, and more importantly, understanding what other people think the economy is going to do.  Trade what you see, not what you think.  Invest what you think.

 

I have been way too impatient, and that has cost me.  Trying to make up losses with incompletely thought out theses' has cost me more.   THat has been where the real pain has been.  MY CAPSscore is down to 11, from a high of 71.  A reflection of my portfolio.

 

I think what's most important is to stay small, and wait for opportunity.  And that means understanding my own psychology of greed and fear. I have abandoned many I: "investments" as trades by DCA'ing losers then cutting lossses, in effect making smaller losses larger losses.  Lucky, I have capital to learn with, and I know that at some point, eitehr a panic bottom, or another violent selloff like the one in July will give me a great opportunity to get in.

 

On a big picture, here's what I believe.  Stock prices will continue to fall despite the best efforts of the Fed, until houseing prices have overshot and inventories are reduced.  Housing prices need to come to a proportional  relationship to income.  That probably means DOW 10k. There will be real economic pain due to credit contraction, which is already occuring.  The velocity of $ is slowing (I work for a major bank and we are actively NOT soliciting loans, and putting all our focus on accumulating cash)  Until banks ease the lending, which means repairing their balance sheets, we will be in debt paydown mode, and thus slower economic activity before the turnaround.

 

China and the other BRIC will be great macro opportunities, but not yet.

 

So there you have it, nibbling in small medium term investments to nibble back at some of my losses.  As for my loser on HOLX, I just ask myself this question.  Yes, I'm down 20% in one day on a position I had no business taking.  It may take a year to make it up.  But fast forward 5 years, and the stock will have looked like a steal at 23, and a chart showing a drop to 18, or even 15, as painful as it is now, will be a blip.  That is hard to take, but virtually every other bad stock I bailed on down 15% promptly came right back up (or down if short) shortly after I bailed.  I have made that mistake 10 times this year.  I won;t make it again.   After all, investing is for the long haul, no?

 

Thanks for the great post.  PS, I want BOLT, but the charts tell me I have a chance at picking up under 20 on the next panic.  There will be 2 more panics, one for commercial real estate, and one for Fannie & Freddy/big bank failure.

 

If it doesn';t happen, my third in stocks should slowly grown, and my cash is safe.  If it does, I'll use some deep in the $ calls on panic day. 

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#2) On August 01, 2008 at 10:43 PM, anchak (99.85) wrote:

A lucid and extremely thoughtful post..... No wonder there are lots of recs and not many comments - because they would be superfluos - like mine are.

I commented on your BOLT pitch too...and echo nuf's thoughts - keeping my fingers crossed to picking it up at 20.

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#3) On August 02, 2008 at 3:33 PM, RainierMan (81.59) wrote:

It's good for us new investors to see that those with more experience face their challenges. I've read about the mistakes that some of the clearly knowledgeable people here have made, and I feel like it's normal for me to wonder how to successfully navigate my way through the investment world. It's really pretty daunting sometimes. I learn a lot here, so it's great that people share their experiences.

 

 

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#4) On August 05, 2008 at 2:21 PM, DarkToast (56.25) wrote:

I am incredibly pleased that I moved to entirely cash just before June 22nd. My CAPS score has moved from 1500 to -1000 since then.

My CAPS rating went from the low 90s to 0.09. This is unfortunate, but I didn't eat these losses in real life.

I am not done with investing, but with the blatant government market manipulation going on right now you will will only get punished for correctly judging where things are headed. I will wait before re entering the market.

There will be a great time to make a market entry, maybe sometime in late August or September. I'll have to wait and see. The only things I have really regretted in my life have occured when I didn't listen to my instincts. 

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#5) On August 05, 2008 at 3:41 PM, LordZ wrote:

IF I had a towel it would have been merciful for someone else to throw that towel in for me.

However as that is not an option, someone please get me a metal chair...

Also as the DUDley boys would say.... brother D....

get the tables...

Oh theres a lot of blood....

Gonna look like a death match...

as opposed to some shakespearean play..

 

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#6) On August 05, 2008 at 9:31 PM, TheGarcipian (62.61) wrote:

Thanks, Russell, for reminding me why I'm investing, although I still think it a bit prudent to move more of my holdings to cash right now. The question for me is do I cash out with my losses now in hopes of avoiding more losses later, or do I have the stamina to ride out the storm (which I think will be equal to, if not worse than, the 2001-2003 slide)... Right now, I'm leaning towards the former. But your post has given me a renewed long-term vision slap-in-the-face... thanks, I needed that!

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#7) On August 08, 2008 at 11:46 PM, herztical (28.05) wrote:

Nice post, I totally agree...anything worthwile is never easy, just like life.  I bought my first stocks in highschool circa '98 (MSFT & CSCO) when they were around 100+ each w/ my summer job money... I know the pain all to well. Your first loss is the best one and in the imortal words of Jimmy V...don't give up, don't ever give up

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#8) On August 11, 2008 at 10:49 AM, FreundInvesting (29.45) wrote:

This is, by far, the most exciting time I've ever experienced for investing. Why? Two reasons:

1.) It allows me to pick up great companies at bargain prices.

2.) This is the time when true investors really shine. It separates the men from the boys, the women from the girls.

I couldn't have dreamed of a better situation for spreading my wings and catapulting to the ranks of the top.

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#9) On August 12, 2008 at 1:21 AM, WCWlooky (22.90) wrote:

RIght on Goal brother!

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#10) On August 15, 2008 at 10:45 AM, EnigmaDude (95.14) wrote:

I find it VERY interesting looking at your CAPS portfolio that your highest scores are all from outperform picks and your biggest losers (by far!) are all underperforms.

Really just illustrates your point in a profound way. Thanks for the insights!

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#11) On August 17, 2008 at 12:16 AM, dwot (75.87) wrote:

I sold everything last fall with the decision to wait a year and reassess the market.  It is getting close to that year and I'm not ready to step back in...

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#12) On August 22, 2008 at 3:36 PM, yippiekiyeh (99.55) wrote:

Not a TMFer for nothing, very insightful and quite inspiring too!

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#13) On August 24, 2008 at 7:34 PM, kamuirei (< 20) wrote:

"But then I imagine what my life would be like if every time I set a goal knowing that the journey would have moments of difficulty, perhaps extreme difficulty, I threw in the towel just when that difficulty I knew was coming actually came."

Tommorrow is my first day as a teacher.  Thanks Russell.

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