My investment in SCC has been one of the worst performer in my portfolio. It is currently down 30% (more or less). Am I already losing sleep because of this? No. In fact, I’m buying more…
I’m not a person to teach a strategy as something that you should follow in every case that you see. Buying when a stock is falling may be good at times, and selling on the other. There are no fixed strategy where you do A when B happens each and every time. Every situation is different. So when people say that you “should never catch falling knives”, once again gave me cringe. Each situation is different.
A value investor’s job is to find cheap bargain stocks. A better investor will find cheap bargain stocks that are great businesses. My position in SCC has been down 30%, but I have owned many stocks that went down -50% (I still own a few) and I learned a lot from those too. When I experienced the crash of 2008, a lot of the stocks went down to 70%. Now imagine you own a stock that went down 70%. You will sell, most probably.. And you will rationalize saying, you will stay on the sidelines until the dust settles before going in again. Now imagine you do not own any stock, you have a lot of untouched cash waiting and a great business just went in for sale at 70%, of course you will buy. Both person are looking at the same stock. But only one of them will be proven right (and rich) later.
Me having -50% in a stock position is just normal. Charlie Munger has said that if you can’t keep your cool when your stock holdings went down 50%, you are not fit to become an investor. Note that, he is saying 50% down across all his portfolio in total, not just one holding. Charlie has held on to his portfolio when it encountered a market crash in 1975 and his portfolio went down to -75%. Which recovered and outperformed the index ever since until he closed it and returned investors’ money. What’s important is the whole portfolio. I may be down -2% year to date in my PH portfolio. But over all, with my US and PH stocks combined, I’m still up around 8% ytd. What is important to remember though is that, value investors have one job – to buy cheap companies. And that means, you should be the one to catch the knives when it is falling. Its a test of courage and conviction. And also a test of how well you can manage your emotions and how well you did your homework. Great bargains are found not when other people are optimistic.. But when people are afraid. Just make sure you have the right thinking and research. Of course you can also be wrong in that. Its hard. And that what makes investing so fun for me.
Falling knives is where bargains are made. It is unwise to wait for the dust to settle because we do not know when it will settle. And usually a fall of that magnitude will immediately rebound and lower prices are gone. Taken by other “braver” investors.