When Market is Hard to Understand

Investment Analysis Clubs Saul’s Investing Discussions
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It looks like most of our growth stocks are plummeting this week for no obvious reasons. Some say that it is because election is near. Some say that these growth stocks are overpriced and they are bound to go back to where they were at the beginning of the year. (Ha! I wish Amazon stock can go back to where they were ten years ago)

Since the FSLY news my portfolio dropped by 20%. :frowning: Yet, it is still up almost 100% since I began investing in the growth stocks this April. I would like to say thank you to everyone here at the board for helping me throughout!

But although I tried to look at the brighter side and keep my spirit high, I must admit that seeing half of my salary vanish in a couple of days especially since I was wondering whether I should trim my positions when we had a good rally two or three weeks ago.

I would like to ask everyone how you deal with this sometimes hard to understand volatility.

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I don’t invest $$ I’m going to need in the next 5-10 years

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I would strongly urge you to think in terms of percentages instead of dollars. “I’m up almost 100% since April!” and accept this as the market going up and down.
Saul

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Don’t react to changes in share price on no fundamental basis (i.e. perturbation of business). This is the time to simply hold and not think about what could have been (e.g. you ‘could’ have trimmed simply based on share price increases and buy back in after things dropped, but that is pure market timing).

I think I read that Saul considers selling sometimes if share price ran up tremendously within a short timeframe for no particularly compelling reason, but correct me on this. I for one do not have experience to ‘predict’ what the market is going to do. We sure are in for a lot of volatility.

I just bought into some of these titles discussed and experienced immediate downturn of the share prices, as if I couldn’t have timed this any worse! But it will be fine, because at least I made the move and took a position.

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Volatility is inevitable. Crowdstrike IPO’d at 100, went to THIRTY before going to 145.

It comes with the territory. We here only care about the performance of the underlying business. As long as that meets our criteria, we hold. But it is reasonable for you to consider what the great financial writer, Morgan Housel - who just wrote the book, “The Psychology of Money” says - he doesn’t optimize for profits. He optimizes for a good night’s sleep.

Best,

BD

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I would like to ask everyone how you deal with this sometimes hard to understand volatility.

Volatility is not hard to understand. It’s volatility. It’s also simply part of the deal, especially in growth names.

That’s not meant to be dismissive. Dealing with this is a big part of investing psychology, which is a sure rabbit hole and can also quickly drift off topic. Did the story change for any of your companies? Did your conviction in any of the theses change? That’s all that really matters.

Guessing why market swings occur and then trying to play them is why most investors struggle so badly to beat the market. Lamenting what you did or didn’t do given the clarity of hindsight is also useless. Don’t do it, and I say that in the sincerest way possible.

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it goes down for no apparent reason. It went up for no apparent reason either.

Either way, one can surely come up with a story.

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During times of increased volatility, it never hurts to remind oneself of Buffett’s thoughts on Mr. Market. From the 1987 Berkshire Hathaway Shareholder Letter:

“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business.

Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business.

When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.

Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.

…[A]n investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.”

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<<I don’t invest $$ I’m going to need in the next 5-10 years>>
I have a friend that became disabled and is now going to need around the clock nursing care. Unless you have good disability insurance liquid cash type savings are not going to last too long under that scenario.

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I have been lurking on this board for quite a while and have never had the conviction to post as I am still in my “drinking from a firehose stage” because this way of investing is so contradictory to everything I did in my first 20 years of investing. I have learned more about evaluating businesses in 6 months from this board than I have in my previous investing life combined. With all of that said, I really do appreciate a post like this in times where I am being exposed to more volatility than I am typically used to. Makes me feel not so bad to know I am not alone. I am 100% confident in Saul’s methodology and totally bought into this this process but while I’m still working to condition my iron will I do appreciate a little levity every once in a while.

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I learned a long time ago that hindsight is an absolutely wonderful teacher: it’s never wrong. By that I mean it’s easy to say “I should have done this or I should have done that.” You have to let that go. If you just invest in stocks with reasonable intelligence (which is what the Fool and the boards are for), and stick with them, you will gain over time. You can set it and forget it. Personally, I do look at my portfolio every day, but only if I’m bored and need some entertainment.

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Since it hasn’t been said - my understanding - based on past historical readings of market insiders/trader writers - is that October wraps up the fiscal year for many hedge funds, and (generally) they sell off the stocks that have made the most for them to raise cash for dividend payouts/ ROCs for redemptions & 2/20 bonus payouts &c.

In 2020’s case, these ridiculous runups in the mid-cap/large cap tech sector stocks has created an easy pool of available candidates to create cash while still booking and championing big returns.

FC

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