Befriending Fear

Investment Analysis Clubs Saul’s Investing Discussions
#1

In dedication to Saul and Neil whose posts spreading the voice of sanity helped me formulate this viewpoint:

Thinking on my the past month where I have dedicated myself to improving my skill in investing there is one lesson which stands out:

Make friends with fear!

In December 2015 I decided to seriously study investing. On the first trading day of 2016 I took the plunge and made my first trades designed to reallocate my portfolio based on what I had learned. Then I watched in horror as those same stocks plunged. Oh, what a mistake I thought I had made! But I held the course and continued to learn and invest.

A month later (3 February 2016), my portfolio is at 93.02% of its starting value at the beginning of the year. In that same time period, the S&P 500 is at 93.59% of its starting value and the Russell 2000 at 88.92% its starting value (which more accurately reflects my portfolio contents). This has me looking back at this first month of serious investing to see what I can learn.

The one trend in my own learning process which really stands out is: fear. Except that rather than be ruled by fear I looked it in the eye, shook hands and made friends. I spent time talking to the fear, listening to it and (ever so slowly) coming to understand it.

Fear was bombarding me from all sides. In the media, even good news is tinted with shades of fear. For every forum post I read with a positive view there were at least equal numbers fearful of oncoming doom. I looked at the falling value of my own portfolio and feared I had just thrown away my savings!

I know from my experience traveling the world that doom and gloom are not upon us, the world is not about to end and fear is simply a signal to be cautious. As I sit here now I am very grateful for the fear besieging me this past month. That fear has become a good friend.

Fear of falling stock prices and lack of customer demand kept me from buying a large position in SWKS at the beginning of the year, giving me time to research the company in greater detail and make purchases at far better prices. Fear of fashion trends kept me from investing in SKX until I had carefully considered the risks and found a good entry point. Fear bred of ignorance kept me from investing in SEDG until I thought carefully about a recent 10% price drop and realized everyone else was fearful yet the company had nothing but positive news.

Thanks to fear, my position in those stocks are all up 1.2% - 6.5% since my purchase (and I see now SEDG is now up 12% in after-hours trading).

Fear had me take a close look at BLL, MIDD and BWLD which led me to decreasing my position size in all three. For now I am still invested in all three however I have better places for that money at the moment.

Fear still has me wary of CTRP, AMZN, LGIH and AMBA. I am invested in these companies and see good prospects in the future however fear has me hesitating. I don’t see anything inherent in any of those companies to explain continued price drops however fear still voices a strong objection when I consider purchasing more. So I am listening to that fear, both my own and that of others; listening and learning.

As I consider those positions now, I realize I cannot loose. If the stock goes up, my fear of missing an opportunity has me invested sufficiently to benefit. If the stock goes down my fear of loss prevented me from loosing anything significant. As I listen to the fear around these companies, buy my own and that of others, I may use the falling price as an opportunity to purchase more shares. I cannot loose!

Thank You fear, for being such a good friend.

Thank You Saul and Neil, for being the voice of reason that gave me sufficient pause to pause and listen to that fear.

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#2

Thanks for the kind words, othalan, and congrats on taking more control of your investing!

If I could make one suggestion: save what you wrote, and put it somewhere where you can look back on it later. It may not seem like it now, but you’ll forget the fear you’re feeling during this period. When the next big dip shows up, things will feel far worse during that dip than you remembered them being during this dip. It will be nice to have something to go back and refer to, to remind yourself that this dip was indeed just as scary, but you nevertheless were able to turn it into an opportunity for the future.

Neil

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#3

Neil, thank you for the suggestion. Noted and saved to my personal list of wisdom to myself.

#4

In the same vein (so long as you are a net buyer of equities):

Now that I think about it, I began to really think of myself as an “investor” when I realized that I was sad when the market went up and visa-versa. Like Warren Buffett says, the stock market is the only one he knows where customers run out of the store when great “merchandise” goes on sale.

Cheers!
Murph
Home Fool

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#5

…As I consider those positions now, I realize I cannot loose. If the stock goes up, my fear of missing an opportunity has me invested sufficiently to benefit. If the stock goes down my fear of loss prevented me from loosing anything significant. As I listen to the fear around these companies, buy my own and that of others, I may use the falling price as an opportunity to purchase more shares. I cannot loose!..

Really enjoyed your bit but having invested for longer than that I’ve found I can and do lose sometimes. Since Mr. Buffett was mentioned, he has been quite open about losing at times. Not a big deal but can’t learn a lesson unless you come to grips with occasionally losing. No big thing in my books.

Sometimes not so easy to know when “great merchandise” is really on sale or there is/was a fundamental flaw in the thesis. Just my opinion but I have always believed that more people lost more money 2001-ish trying to catch “great merchandise” 80% off the regular price, on the way to zero. Can’t prove that.

Good luck with the investing.

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#6

Really enjoyed your bit but having invested for longer than that I’ve found I can and do lose sometimes. Since Mr. Buffett was mentioned, he has been quite open about losing at times. Not a big deal but can’t learn a lesson unless you come to grips with occasionally losing. No big thing in my books.

You miss my point. I don’t mean that I can’t loose money. Of course I can! I mean that in the grander scheme I can’t loose. I will make mistakes, probably some major ones. But in the scope of my overall portfolio and my path through life I cannot loose! Worst case scenario: I learn a very valuable lesson at the cost of something which is, to me, of relatively little worth.

#7

Stock market lessons are among the most expensive ones and it’s good to be, if not fearful, cognizant of the lurking danger.

My biggest problem right now is keeping cash out of the market. A lot of great looking stocks are just going to get cheaper and even if they don’t buying on the way up is safer than buying on the way down, even if they rebound, which they might not.

Selling covered calls is one way to profit from or at least lessen the loss from falling markets, just make sure the strike price is high enough that you don’t regret “losing” the stock.

One way to deal with the fear is to figure out why the market is in bear mood. It helps a great deal in formulating short term tactics to deal with it.

Denny Schlesinger

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#8

re: Fear

Denny writes in part: One way to deal with the fear is to figure out why the market is in bear mood.

Denny,

Let’s peruse the following as to why !

http://stockcharts.com/h-sc/ui?s=%24BDI&p=D&yr=0&…

If stuff isn’t moving around the globe by sea, then nobody is buying, no matter how much stuff is being produced due to the industrial over-capacity created by global central banks flood of free money, nor how low prices for it have fallen for what once was being shipped. No buyers means falling prices. No buyers means “Recession”. That’s just basic Dow theory, right? If ‘industrials’ and ‘transports’ are down, the economy is slowing. - Arindam

Timberrrrrrr

http://stockcharts.com/h-sc/ui?s=%24SPX&p=D&yr=0&…

http://stockcharts.com/h-sc/ui?s=%24NDX&p=D&yr=0&…

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#9

Stock market lessons are among the most expensive ones and it’s good to be, if not fearful, cognizant of the lurking danger.

Perhaps my perception is warped. I’ve had a stock loose 98% of its value, another 90%; I sold both and never looked back. In 2008 I watched my portfolio drop 67.2% in value. Yet the “expense” of those lessons (and others in investing) is almost inconsequential compared to what other lessons in my life have cost me.

Fear? Yes. I’m only human. But I know fear is my friend in life and in investing.

Risk? Unquestionably. That can be managed and mitigated with applied knowledge and wisdom.

Lurking Danger? I just can’t see it. Perhaps I am missing something. Perhaps my perception is warped.

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#10

Denny,

My biggest problem right now is keeping cash out of the market.

Me, too. I bought more SWKS this morning. More INFN yesterday. Best I can do is make small purchases. I know there is one part semi-rational “SALE!” and one part emotion, but it is what it is.

KC

#11

As a lot of people feel, my timing rarely seems to be good.

Yesterday I purchased 3 large positions (for me at least, not really that large in the grand scheme of things, even percentage-wise). But they’re all at least 5% down today.

Luckily I still have a fair amount of cash to buy, just don’t want to over commit it all too early.

Guess I’ll just stay the course, keep making purchases as things look more (and more!) attractive. No matter how much worse my portfolio is currently looking.

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#12

Perhaps my perception is warped. I’ve had a stock loose 98% of its value, another 90%; I sold both and never looked back.

Losing a position is not all that unusual, that’s why we diversify and it’s not what I was referring to. When I speak of loss I mean portfolio wide loss.

Yet the “expense” of those lessons (and others in investing) is almost inconsequential compared to what other lessons in my life have cost me.

I’m referring exclusively to monetary loss. I wonder what you include in “other lessons.” Or maybe your portfolio is only a small part of your assets.

Denny Schlesinger

#13

I’m referring exclusively to monetary loss. I wonder what you include in “other lessons.” Or maybe your portfolio is only a small part of your assets.

I don’t have other assets at the moment. Limiting to a purely monetary perspective, I still stand by my statement. Though it seems to me a very strange limitation and the differentiation is fuzzy at times. As you might guess there is a story here but it is VERY off topic for this board.

#14

As you might guess there is a story here but it is VERY off topic for this board.

Yes, I suppose it is.

Limiting to a purely monetary perspective, … seems to me a very strange limitation and the differentiation is fuzzy at times.

Maybe it’s the fact that portfolio performance is easy to calculate while other “lessons” are not. An example, in 1964 I was made an offer by IBM which I refused. In later years I ascribed the refusal to my own lack of maturity and experience at the time. One thing is clear, it changed the course of my life. I have no way of comparing a potential corporate life at IBM vs. my real life mostly as an independent self employed professional.

Denny Schlesinger

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