If you started investing only in the last year, you may be spoiled by now. All you have seen is that the market going up every month and some of the stocks were up well over 100% in the last year alone. This week, I had planned to write about earnings reports from some of my holdings (Etsy, MercadoLibre, Twilio etc.) but the market has been especially volatile in the past few weeks and some of these holdings fell well over 10%. So, I am writing about investing mindset and try to convince you that this is not the time to get scared and sell your holdings. In this post, I talked about my investment process and why I stress upon keeping an emergency fund that can last you at least 6 months to a year so that you are not forced to sell. In fact, this is time to go shopping because some of the companies that are growing very well are available at a bargain.
I do know the pain of buying something and see its price cut by 10% or more within a week or so. No amount of reading can prepare you for that. You can only understand that pain by experiencing that drop. But do know that if you are buying a quality business, you are not buying it for a week or a month, you are planning to buy and hold for at least three years. Ask yourself, if the company will do well in the next three years. If so and the price doubles in three years, that is a compounded annual growth rate (CAGR) of 24%. That is stunning. A double in five years is 15% CAGR. I will take that any day of the week.
I will list down some of my favorite investing quotes that help me during this time to handle all this volatility.
- Investing great Warren Buffett said it best: “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” Think about this. One of the reasons investors lose their calm is because they are checking the prices of their holdings every day flashing in red. What if the market closes down and you are only looking at the performance of the business every quarter or every year and not worry about the price of that business. As an example, ETSY released their Q1 earnings last week and their Q1 2021 revenues were 141% higher than their Q1 2020 revenues. 141%!! ETSY is now the number 4 visited website in the whole world. But you wouldn’t know it if you looked at the share price of ETSY after the day of their earnings release. The stock price of ETSY fell by about 15% because they are guiding for “only” a 25% increase in revenues in Q2 2021. I will take a 25% growth after a year in which they saw triple-digit growth rates in the last year.
- David Gardner, co-founder of the Motley Fool says “Stocks always go down faster that they go up, but they always go up more than they go down”. I have personally seen this happen way too many times in the last decade in my portfolio. Another version of this expression that I have seen many times. “Stock prices go down on an escalator but they come back up the steps”. In other words, be patient and don’t get scared of selling at the bottom.
- My favorite investing quotes of all time are by Peter Lynch, the famous fund manager of Fidelity Magellan Fund for 13 years (1977-1990). I enjoy reading all of them but these three are personal favorites
- “More people have lost money waiting for corrections and anticipating corrections than in the actual corrections.”
- “In the stock market, the most important organ is the stomach. It’s not the brain.”
- “Stocks aren’t lottery tickets. Behind every stock is a company. If the company does well, over time the stocks do well.”
In thinking about the above three quotes from Peter Lynch, I personally know many people, who got scared after the 2008 Financial crisis, and never invested again in the stock market. Can you imagine how much money did they lose by staying on the sidelines and not investing in the stock market. Many times, we are tempted to time the market, what if this is the top, we should sell everything and then buy back when the market is bottoming out. Two problems here. You have to be right twice. First that this is the top and second, figuring out if you are at the bottom. Not only that, once you sell out everything, there is that tiny problem of taxes. If you have capital gains, you will end up paying a chunk in taxes. That is why the first quote by Lynch makes so much sense to me.
In this article, I talked about the Archegos crash and LTCM crash of the 1990s. Some of the people involved in these crashes are stunningly smart people. A Noble-Prize winner in economics. An MBA from the Carnige-Mellon University. It doesn’t matter how smart you are. Your emotions and your ability to stomach the volatility will determine your success in your investing career. Stay the course and keep buying great companies.
I know so many people, if they are buying a fridge or a TV, they will spend so much time on researching various brands, the pros and cons etc. Heck I was one. For the initial five years of my employment, I did not know which mutual funds were in my 401K but I knew which sound system was the best for my needs. But when it comes to investing, people would put 5,000 to 10,000 dollars in some idea that they heard from someone on TV. That is not investing. To invest in a company, try to do some research and find out if it checks some of the boxes for you. If you are a busy professional and do not have time to research, stick with index funds. You will do better than most of the professional money managers.
The core of what I have learned about investing in growth companies in the last decade is this:
When the market is optimistic, some of these stocks will trade at absurd valuations (2nd half of 2020!) and when the tide turns, the prices will fall to levels that make no sense at all (1st quarter of 2020). The reality is somewhere in between. What is the appropriate value of these stocks right now? I have no idea. But I do know that the companies that are growing their revenues at 30, 40, 50% or more every year will be valued higher 3, 5 years from today and I am happy to hold and add at these prices.
Do you agree with these thoughts? Feel free to share your thoughts and how you stay calm during these times below.