Designed To Fail…
April 28, 2010
Multiple Expansion
May 10, 2010

On Getting Splattered…

There are good days, there are bad days and there are awful days. Today was a debacle. Almost everything our fund owns was down. Some positions were down more than ten percent. Even worse, we stopped out on a number of trading positions. It was a mess. Our portfolio looks like a crime scene—all red. My dad tells me that some days you’re the windshield and some days you’re the bug. Today, we got splattered by an 18-wheeler.

I’ve invested in the markets for a decade and focused my energies on smaller more volatile companies. When the broader market has a bad week, my companies feel it worse. It is part of the game. Big upside from smaller companies isn’t free. It comes with a price. There is much more volatility. The market occasionally delivers severe beatings. Sometimes, you need to take a step back, grab a beer and marvel at how much you lost.

It’s frustrating. It’s discouraging. Frankly, it sucks. I’ve been here before—far too many times. Life goes on. So does the stock market. The important thing to remember is that this is part of the process. There will be down days. You cannot let it affect you mentally.

Here’s the typical broker speech. “Stay the course. You own good companies. Things are fine. Don’t panic at the lows” These are just parables to cover up for bad advice. DO NOT simply stay the course. That is stupid. Anytime you lose big money, there has to be a lesson.

On days like today, I take a deep breath. I take a few hours to clear my head. Then I reevaluate. Markets do not just drop for no reason. What’s going on in the world? How are my companies impacted? Are they really immune? How is business really going? Has anything changed? Is this a short term blip—or could my businesses be permanently impaired?

Big losses are a wakeup call. They make you work harder. They make you reevaluate your portfolio. You have to dig deeper. Do I really know what I own? Do I really own the right stocks? At what price do I want to add? Am I listening to the messages of the market?

If I have a position that I am worried about, should I just sell it now? If I wanted only a few percent better price—why hold out? Cash is king when the market drops. It allows you to buy more of your favorites. It lets you take advantage of when other people panic. This is why you ALWAYS keep cash available.

It is important not to overreact. It is stupid to sell a stock because it is dropping. Do not panic. If it’s cheap, buy more. NEVER sell something because you want to buy it back lower. That will work a few times—then you’ll have the best one get away from you. If you have trading positions, it’s stupid to let a small loss become a big one. If you no longer want it, take the loss. If you are on margin—GET OFF!! Leverage is death.

Remember, losses are part of the game. It happens. If you let it paralyze you, you will never make money.

I want to mention that I sold my MF Global (MF:NYSE) at 8.20. It was a trade. At one point I was up almost 20%. I ended up losing a dime. Such is life. When winning trades get back to break even, I toss them. Discipline has saved me plenty of headaches. Besides, I want the capital to buy more of my little companies in case any of them get hit.

Categories: General
Positions Mentioned: none

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