A Roller Coaster Only Hurts If You Jump Off

Being an investor in this day and age must be an awful lot harder than it was back in the days before you could simply buy or sell a stock with a few clicks or taps.  Now, I’m not talking about the speed and convenience of online trading – I wouldn’t give those up for anything!  Rather, I’m talking about the temptations that quick trading has introduced.

It’s all too easy for a person to get swept up into the temptation to buy a stock that is surging upwards to new heights.  But even easier is the temptation to bail out of a stock that is plunging toward new depths.  Having a smartphone at our side also makes being a rational investor a whole lot harder, especially if we choose to react to every burp and hiccup that the stock market makes throughout an average day – and the odd belch on certain days!

My point is that to buy and hold when things look bleak is a skill that only a few of the most disciplined investors have mastered, especially in this day and age of impatience and instant gratification, and so I’m going to tell a personal story that will hopefully encourage you to work toward holding on no matter what temptations might come your way!

What every investor fears

In late 2013, I was a few months into the re-structuring of my stock portfolio from the disaster it had been to that point.  I was in the early stages of laying the foundation of the much stronger portfolio that it is today.  And one of those purchases at the end of December that year was a company that I had used many times to buy products, and so I thought it was only natural to now buy a few shares of Amazon (AMZN) itself.

The price had surged to an all-time high of $393 per share and I got caught up in the thinking that I’d better get in before it surged even higher.  I didn’t want to “miss the boat” on this one.

As always, there’s this great unknown when buying a stock, this secret fear that it will drop into oblivion soon after buying it no matter how impressive the stock chart has been up to that point.  It was less than six weeks later when, after reaching an all-time high of over $400, that it dropped to below $350.  After that, it made a few attempts to recover, but not before dropping below $290 on three occasions over the next year.

It’s not what happens, but how you react to what happens

Now, losing a quarter of a stock’s value is certainly not a disaster, especially if you have other stocks that are doing well.  In my losing past, I lost over 90 percent on some stocks (before I learned the rule about cutting losses short)!  But this time it was incredibly disheartening because I had hoped that the days of big losses were over.  I had had enough of that for most of a decade.  And this one looked worse because it was over a $100 loss per share as opposed to, say, a stock going from $50 down to $35, even though this is about the same percentage loss.

But if there was one key lesson that I had learned from my losing days, it was this:  every quality company’s stock I had ever owned that had dropped had ALWAYS recovered and surged past the price I had bought it at.  It wasn’t a question of if, but rather a question of when.  And so I had to take the approach that even though this stock had plunged like a roller coaster, I figured that jumping off would hurt more than holding on, and that it would hurt a whole lot more if I jumped off and the stock eventually recovered.

And so I held.  Fortunately, the sting of the loss was soothed by surges in some of my other stocks over that year, but I was still tempted more than once to think that I could sell my Amazon shares and try to make the money back through another investment.  However, another lesson I’ve learned is that almost every time I’ve done this (even in the past couple of years, unfortunately), the stock I’ve sold eventually recovers, sometimes even earning a much greater return than the stock I bought in its place.

And so I held.  Then, in mid-January of 2015, less than four months ago as of this writing, a much-better-than-expected quarterly report sent the stock soaring from around $290 to over $360, eventually peaking at nearly $390 in early March.  After settling back a bit, I’ll admit that I was tempted again to sell and buy another stock that I thought would grow my money quicker.  But again I held on, the price crept upward, and less than a couple of weeks ago, Amazon released numbers for the first time about its Amazon Web Services, and that sent the stock soaring from around $390 to $445!

What would you have done?

Sixteen months was certainly not a long time for this stock to be languishing before it blew past what I bought it at.  I’ve known of stocks that can take several years to do this.  And a current return of just over 6% as of this writing is nothing to get too excited about.

But my question to you is this:  Would you have held on through all of that?  And if not, and you sold at its lowest point (which most people would have done), are you sure you would have found another way to recover that loss?

That last question kept my thoughts in perspective as the stock dipped three times to new lows.   If I had jumped off, would I really have been able to recover my losses by jumping onto something else?

Know why you invested in a company, and then remind yourself

So why else did I hold onto Amazon after I felt my stomach drop?  This is when I had to remember the reasons for buying shares of this company in the first place.  Also, had my investment thesis changed?  No, it hadn’t.  Sure, Amazon had a dud with it’s Fire phone and so they incurred a loss, but the rest of the business kept humming along.

I had to remind myself of Amazon’s global, growing dominance in cloud computing via their Amazon Web Services.  I also kept the statistic in mind about how still only a small percentage of all global retail purchases are made online, giving Amazon and all web-based retailers a lot of room to grow.  And considering that Amazon is still the global leader in online retail, I figured that they’d once again fire on all cylinders sooner or later.  A single mistake like the Fire phone wasn’t going to destroy a vast empire like Amazon.

Lastly, even though they’re not incredibly profitable, that’s because they’ve invested most of their profits into growing their business.  This isn’t very sexy for short-term investors looking for big quarterly profit numbers, but it’s incredibly sexy to investors who have a long-term outlook.

Even if Amazon takes another tumble someday, hopefully the share price will have grown enough so that I’m still above what I bought it at.  But since buying shares in Amazon, I’ve also purchased shares in several other companies, and so my risk of owning any one stock has been greatly minimized.

The secret to growing your wealth

I hope this story has encouraged you to consider what to do when one of your stocks seems to fall off the map.  In particular, you need to consider:

  1. Why did you buy the stock in the first place, and has the investment thesis changed?  If not, then there’s no credible reason to sell.
  2. If you sell at a loss, will you really be able to recover that loss in something else, or would it be better to just hold on?
  3. Is this loss hurting more because you own too few stocks?  Perhaps you need to minimize your risk by owning several stocks instead of just one or a few.
  4. What’s your timeline?  If you’re investing for short-term gains, then you’re more likely to get jittery and sell at even the slightest loss, always taking losses and never waiting for recoveries and eventual profits.  If you’re investing for long-term wealth appreciation, then you’ll be willing to hold on no matter what if the company still seems to be a good one.

This last point is the secret to growing wealth through investing.  Buying a quality company (rather, a number of quality companies) and then holding on no matter what is what so many people are unwilling to practice in this day and age of impatience and instant gratification, yet it is the only statistically proven way for a stock investor to grow and multiply wealth.

I hope you that you will have the guts and the patience to join investors like me on this journey, to hold on even when the investing roller coaster takes you on the wildest ride of your life.

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.