How I've recouped almost $5,000 this year by doing absolutely nothing
Patience is a virtue, especially when it comes to long-term, buy and hold investing. But it's a quality that many everyday investors lack, as evidenced by one of the biggest investing mistakes I see: panic selling. When the market drops, people freak out. They think they're going to lose all of their money, so they sell their stock for whatever price they can get.
If I had done that earlier this year when the market tanked, I would have lost nearly $5,000. However, because I knew there was nothing fundamentally wrong with the handful of companies I own, I held on.
You see, a loss only becomes a loss when you realize it. And I'm not talking about "realizing it" in some strange, mental awareness, "if I don't look at it, it didn't happen" kind of way. In the investment world, realizing essentially means "booking". If you buy a stock at $10 and it goes up to $12, you haven't actually made $2 per share until you sell your stock and book that profit. The same principle applies when a stock's price drops - you don't technically lose money unless you sell your stock at a lower price and realize the loss. Unfortunately, that's the mistake most people are all too quick to make.
If you owned a stock that dropped from $80 to $50, what would you do?
Panic? Jump ship? Sell it? Cry?
Say "F*** this" and vow to never invest again?
That's the very question I was faced with about six months ago. A particular stock that I've followed and have been invested in for years all of a sudden fell out of bed with the rest of the market. It's a large conglomerate that operates some businesses in the energy space, so that was weighing it down. It also has a lot of debt, and even though it's incredibly well structured, interest rate fears were plaguing it too.
The way I saw it, I had three options:
- Say F*** it and sell my stock.
- Hold on and do nothing.
- Double down and buy more.
Option #1 wasn't really an option for me because I knew that the stock was far undervalued around $50. If I had sold it, that meant someone else would have bought it from me, and that person would have made a lot of money off of my fear. I wasn't about to just hand my money to someone else.
Option #3 was a better choice (and the most profitable in hindsight), but I decided not to buy more stock for a few reasons:
- First and foremost, I already have a decent chunk of my portfolio in that particular company, and I didn't want to add any more single name risk (diversify or die!).
- Second, the market was extremely volatile at the time. Even though I felt the stock was super cheap, I wasn't convinced that the panic selling had ended yet. The stock could have continued to go lower just as easily as it came back up. And even though the biggest investing lesson of these last few years is to buy every dip, I wasn’t trying to catch any falling knives.
So I went with option #2: ride out the storm. Again, I knew nothing was fundamentally wrong with the stock and that the panic selling was overblown. But I wasn't ready to increase my exposure to the company either. The "loss" in my portfolio was still unrealized, and as long as I didn't sell, it had a chance to come back up. This particular company also happens to pay a hefty dividend, so I was still earning passive income on my investment in the meantime. I was basically getting paid to wait for the market to come to its senses.
PATIENCE PAYS OFF
And come to its senses it did! Last night while brainstorming new blog ideas, I got an alert from my trading app... Not only had this particular stock come all the way back up to my cost (the price I paid for it), but so had one of the other stocks I own! My patience and discipline had paid off, and I decided right then and there that I had to share this important lesson with all of you.
Now you may be wondering what my plan of action is going forward. It’s what it’s always been: hold on to these particular stocks until they reach my price targets. At that point, I’ll evaluate whether or not there’s any more upside to be had. If I think there’s more growth potential, I’ll happily continue owning the stocks. If I think they’ve reached their peak, I’ll sell them and hope they drop back down for me to buy again at a lower price.
moral of the story
When it comes to investing, qualitative skills like patience and discipline are just as important as quantitative, or analytical, skills. You don’t have to know every company’s story, you just have to know a few really well and trust in your analysis and conviction.