When asked what they’d rather fight, a horse-sized duck or many duck-sized horses, people choose the second option. In the stock market, both possibilities can wipe you out: either a big drop or many small drops.
It was around the time when the infamous “Yen-carry event” was happening that the drops in the share price of one of the small-cap companies I was invested in started adding up fast. The price was going down seemingly without any signs of stopping at the floor of $1. When it blew through that floor my heart sank.
The small-cap company is still listed on NASDAQ and the requirements state that it must have a share price of at least $1 to continue being listed in that exchange. If it stays below that floor for more than 30 consecutive days, a notice of delisting is sent to the company.
I knew the price wasn’t allowed to be below the $1 floor, but I recalled the notice time being 4 days, not 30 days, so I panicked. I sold, bought back in, sold again, and bought back in while it would fall through the floor. That is not the accepted behaviour of a person focused on fundamentals, but we’ll get to that shortly.
I consider myself an intelligent individual who’s competent enough to work as a software engineer and who’s reading loads of books about any random subjects I’m interested in. But that sudden fall triggered a mechanism that simply overpowered my logical reasoning. I had held Tesla through the 70% drop after buying at the peak in 2021, so I thought I had the emotional strength to go through other drops with the same serenity.
Finally, the “Yen-carry event” showed me how it feels to have your stomach fall to the floor. I’ve read many investing books, however, nothing can prepare you for investing. As a novice simply reading about strategies, portfolio management, stock picking, fundamentals, checklists, and so on made me feel a bit smug, somewhat confident that the knowledge I’ve gathered would shield me when the time would come. Nothing prepares you better for the stock market than the stock market itself. You have to live through it, the good, the bad, and the ugly.
So there I was, with a big chunk of my portfolio sitting in that one company and then vanishing bit by bit. I sold at the bottom, as panicked people do, and then cemented a big enough loss to make me rethink my life choices. The market showed me that I wasn’t as prepared as I thought I would be after 2 years of investing and reading whatever I could get my hands on.
The idea to have a sizable chunk of the portfolio in one company comes from a piece of general advice given by big investors who have most of their money in their “best ideas” but trying to replicate the techniques of any investors without considering their context is a recipe for disaster. As it turns out, you need to ensure your best idea is profitable and not liable to fall to hell at a moment’s notice.
Looking back at how I failed during that share price fall, I noticed that the stock market lifts a mirror in front of your face, and you better be listening because you want to avoid the pain of being wrong again. So, I started listening and the first move was to diversify my portfolio and have more shares than previously. Even if I lost one of the shares, it wouldn’t hurt that much. Failing teaches you more than winning.
I’ve also learned to be more suspicious of what management says, especially when big promises are delivered during company presentations. I’ve learned to revisit my assumptions and acknowledge that I push a lot of hope in any of those assumptions.
One of the biggest reasons I was invested in that company was the prospect of big returns. If I were to make big returns, why not allocate a bigger chunk of the portfolio to it? The glamour of multi-baggers works wonders on the human mind and warps any piece of reason to conform to a hopeful vision. Yet, true multi-baggers are profitable companies that are steadily growing and do not seem to generate noise. The halo of this possible multi-bagger divorced my brain from clear thinking. “Only if they’d get past this stepping stone, then they’ll grow to the Moon,” I told myself.
Reality kicked in hard and I’m glad I learned this lesson while still a novice. While my portfolio is small enough, any loss hurts. This is the game I must play to become a stock picker: embrace more failures, hopefully different failures, lose and win, and hopefully learn to have the humility to take on the stock market with open eyes.
When I started investing, I thought, in my arrogance, that within a year, I would have it all figured out. Investing is a life-long job and it is a new domain. You don’t get to work as a software engineer just by reading books. You need to go out there and do the work, suffer through hours of pain while resolving bugs, ask for help when needed and simply build more complex things as time goes on. Why would then investing be any different or easier? I have to put in the work, the brains and the heart, to get through it.
With the benefit of hindsight, it seems that I’ve been trampled by a litter of kittens. All those drops were fluffy things which wouldn’t hurt that much normally. But not having proper discipline made me a sure victim of those pesky little fluffies.
I was chasing big returns. Now I‘d be happy to have smaller returns or maybe some returns.
OK, I’d be happy to have ANY positive returns.
This article has been first published in SIGnet Newsletter – November 2024 | Issue 59.
This article has also been published in ShareSoc Informer – December 2024, Issue 130.