A Test for a True Investor

As you may all know, I run a little discord server for the members of the website How to Invest for Beginners. That website teaches the basics of investing to normal people. My attempt at teaching people how to invest. And as this COVID-19 pandemic is wreaking havoc all throughout the world, I get a lot of messages asking me what to do with the stock they have bought after they went down to 50% or more.

Being transparent in this blog, you all know that I have -50% or more in my portfolio. One of which is SCC and the other is ABS. And I sleep like a baby even having a chunk of my net worth invested in these stocks. Even if that means they are now half the value of my original investments.

What investing is all about?

What you have to realize is that, investing is more of an emotional, logical and psychological game than anything else. Knowing how to analyze financial statement is the rule in which everyone should know. It is a requirement. Without it, you can not play the game. Well, actually you can, but its like playing poker without looking at the cards. What you do afterwards, is the real game. Would you succumb to the pressure? How would you think about the investment when this one doesn’t pan out? What are the other risks that I haven’t seen yet or doesn’t know? How would I minimize risk? What are my diversification options? Is my cash enough to weather the storm?

You have to be comfortable with uncertainty. Own your decision to buy or to sell. Hold yourself accountable. Learn to think in probabilities. Be patient for the right moment to strike and gather enough courage to do just that while the majority is against you. Its the most fulfilling competitive game where the big wins are the ones where the majority is wrong.

Being early and being wrong looks like the same thing.

And it comes with a price. There will come a time when your investment would become 0 (zero). Sometimes it would be -50% or even -70%. But these numbers doesn’t really tell you anything if your decision is right or wrong. Simply because being early looks the same as a being wrong. And being right can also means being lucky.

Of course if the stock went to 0 (zero), that’s 90% guaranteed that you’re wrong. But even in those cases, you should still be able to shrug it off and continue your journey.

The output of a decision does not tell anything about the quality of the decision.

When a stock goes to -50% it does not tell you anything if you made a mistake or not. A stock can go -50% without any reason, the same way as a company with only 1 store can go up 10x in a single day. We have all seen it in IPOs and basura stocks where people manipulate the stock price. If you buy a basura company and went up 10x in a day, you might feel like a genius but you’re still wrong investing in that company. The same is true if you bought a great company and it went -50%. The outcome does not say anything about the quality of the decision. Do you see my point?

Its different for you and me

So when people ask me what to do with a -50% stock. I don’t know what to answer. Because each one of us feels differently about the stock we have bought. I don’t have the same anxiety as the other people asking what to do with the stock. So even if I say “don’t do anything” I know that it doesn’t really work because he could still feel anxious with that red colored percentages in his portfolio. And in any second, I could change my mind without the other person knowing. So you see the problem here when you tell people about the stock you have invested in. There’s some sort of guilt associated with it if it goes down. I don’t have to feel it, because we are all investing for ourselves. But I feel it nonetheless.

How do we know if we made the right decision?

So how do we know if we made the right decision? If the -50% red colored percentages is not a good enough indicator of our decision, what is?

The question is not how, but when. It is time. Time will tell you if you’re wrong. Truth will come out in due time. Are you willing to wait for that? Nobody would tell you when that time is. It could be next year, five years or even 10 years from now. Who knows?

Being an investor is not for the person who always wants action. Because that is the natural state of things – to move, always moving, always taking action. It is the human bias to always act. The illusion that you have to always move to make anything happen. Controlling that natural state, being patient, doing nothing, means you are transcending that natural state, you are being logical and rational. You becoming, (in my view) somewhat above normal human. Maybe the best decision is just to wait? If you want to get the stock that goes to +400% or more, you must have the patience to hold on to it for years. Because a 400% increase can not happen for the short term. Same is true if you have a -50%. You must have the patience to wait and allow time to prove you right… Provided that what you bought is right, of course.

Being an investor means you have to be comfortable watching plants grow. And sometimes some plants won’t survive. And you have to be OK with that.

For people who are asking, yes my overall portfolio is still in the green. In the upper single digit gain year to date. Simply because of my US stocks skyrocketing the past few months. If you would like to invest or trade in the US, you can read my etoro review.

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