I hope that what I’m about to share will help you recognize possibly the greatest reason why people lose money in the stock market. If you can overcome this hurdle, I’m confident that you can experience long-term success as a stock investor. Why I’m so confident is because I’ve had to overcome this same hurdle myself not just once, but every time I buy new shares in a stock and often with very good long-term results. One of those times occurred recently and it served as the inspiration to write about this.
I seem to have the uncanny knack, more often than not, of buying a stock right before it takes a dip. Sometimes that dip is small and short-lived, but other times it’s more gut-wrenching, steeper and sometimes taking at least a year to play out. In another post, I told the sorry tale about how about how my investment in Amazon (AMZN) lost over a quarter of its value within the first few months. Another investment that had me almost losing my mind was a nearly 60-percent loss during the first few months of owning XPO Logistics (XPO). Then recently, I bought shares in Okta (OKTA) that dipped as much as over 10 percent below my purchase price within the first two days after buying them!
What I’ve learned is that the most stressful thing about buying a stock is never knowing where the share price will go right after you buy it. Statistically, it has an equal chance of going either up or down, but the greatest stress is caused when it goes down right after you buy it – the steeper the drop over a shorter time, the greater the stress.
It is not knowing how to handle this stress that I believe is the cause of most people losing money in the stock market. Once somebody notices that one of their stock investments is losing money, emotions ranging from calm to outright panic can set in based upon one’s investing experience and the proportion of money that one has in that particular stock.
I’m going to describe how I’ve handled the three instances I mentioned above. Please note that I’m not trying to brag or boast, but rather trying to inspire you to make rational decisions when things are looking scary.
The Amazon plunge (over 25%)
I give more details about what happened in the other post linked to above. The bottom line is that when I was tempted to sell at a loss, I had to re-visit why I bought the stock in the first place. Prior to being a shareholder, I had used Amazon for several years and figured that if I liked and used it so much, how many others must feel the same way? What ultimately sold me to invest in it were the statistics that showed only a small proportion of all retail transactions occurring online, roughly about 10 percent, both back in late 2013 when I bought Amazon (and only a few percent more today). Seeing how Amazon was and is the global e-commerce leader and seeing the huge growth potential, I figured that this would make a good investment even if the road could be rough in the short term.
Indeed, the road became very rough, very soon. Many investors in early 2014 started to worry about Amazon’s lack of profitability, but the few long-term investors weren’t worried because profits were being re-invested back into growing their business. In time, these would help Amazon to produce a profit. However, the share price suffered in the meantime because there were more short-term than long-term investors moving the price.
It was about a year later that the first results about the profitability of AWS (Amazon Web Services) sent the stock skyrocketing and it hasn’t been tripped up very much since. Also, investments in its warehouses and logistic network have paid off in the past couple of years, and now it seems that investors can’t get enough of buying Amazon stock even though it’s now around $1,700 per share.
Again, the key to me holding on during such a big dip was re-visiting why I bought the stock in the first place, but also believing in the long-term potential of the company and the industry it is in. Most importantly, I also needed to realize that a loss was not really a loss unless I actually sold the stock. I kept telling myself that this was only a theoretical loss, a loss ‘on paper,’ and that if I just held on then maybe someday it would get above what I bought it for.
My discipline and patience have so far proven correct as I’ve now made a return of over four times my original investment and Amazon currently shows no signs of slowing down.
The XPO Logistics plunge (nearly 60%)
When this stock first came to my attention, it was after the price had been driven up a fair amount. It’s hard for me to resist buying at times like this because I fear that I might ‘miss the boat’ and the stock price could go a lot higher if I don’t buy in right away. As with Amazon, I was too impatient to wait for the stock price to cool off before buying in and sure enough, the price started to drop shortly after. However, this was minor until another factor that nobody had foreseen soon came into play. XPO decided to spend $3.53 billion on acquiring a major France-based logistics provider. It was an enormous gamble that would more than double the size of XPO, but several investors became concerned that the acquisition might not go smoothly or that it might fail altogether. Too many investors got too nervous, again the short-term ones. Therefore, the price sank down close to $20 after I had bought it at almost $47 per share.
But the wild card that kept me holding on was the reputation of the CEO, Bradley Jacobs. Had I not known about his past track record of starting companies from scratch and turning each into billion-plus dollar enterprises, I probably would have bailed out at the bottom. This illustrates how important research is in addition to a stock recommendation. Seeing how XPO was his latest project, I decided to believe that the expensive acquisition would be successful and that the stock price would eventually go above even what I paid for it.
My discipline and patience have so far proven correct as I’ve now made a return of over two times my original investment and XPO Logistics currently shows no signs of slowing down.
The Okta plunge (over 10% in two days)
So how did I react to something like this that was only a couple of days in the making? Well, first of all I reminded myself of how much discipline and patience had worked for me in other situations, including the two already described. Also, I noted that this price plunge had absolutely nothing to do with any company weakness; they had recently released first-quarter results that were again very solid with also very promising growth prospects over the short and long term. They are also the leader in their industry. It was simply one of those weird times when factors beyond a company’s control caused a price drop. When this happens, when a price drop has nothing to do with how a company is performing, then I choose not to panic, even if there’s something happening on the world’s political or economic stage. The sun will rise again tomorrow and the company will do more business and acquire new customers and create new innovations as it has done since its inception. And so I hold on – yes, very ticked that I can’t predict the future and wishing I could have bought in over 10 percent lower, yet confident that very likely in a few weeks or months, this particular stock will very likely go above what I paid for it.
So there you have it, concrete examples of how I have handled the most stressful thing about buying a stock, namely what happens when the price dips after buying it. (Of course, this hasn’t happened with all my purchases; I’ve described some of the worst examples.) If I had decided to bail out when things were the most scary with any of them, then my losses ‘on paper’ would have become actual losses. I needed to:
- remain calm rather than give in to fear
- be patient and wait for my investment theses to pan out, to see the long-term picture above the short-term noise, i.e. I needed to see the forest and not the trees
- remind myself that each investment is only one of several that I own; seeing how I never have more than 10 percent of my initial investment money in any one stock, I have no reason to panic when one of them hits a rough patch, especially if I already have a sizeable gain
As I stated before, I believe that not knowing how to handle the stress of a falling stock price is the cause of most people losing money in the stock market. The market is designed to kill the fortunes of the impatient and bountifully reward the patient. It is the ultimate sorter of the wheat from the chaff, the mature from the immature, the experienced from the inexperienced. Which would you like to be?
Hopefully these examples have inspired you to take a breath and make rational decisions when things are looking scary as a stock investor.
One last thing: be sure to click the Follow button near the top of this page. Also, if you’re a brand-new stock investor – or still thinking about it – then I highly recommend starting with my 5-part Stock Starter Series. To new beginnings!