Karen, watching the market every day can be emotionally exhausting, especially when our company stocks aren’t behaving as we think they should given the business performance. That’s when it’s easiest to begin second-guessing yourself and make mistakes. There’s absolutely nothing wrong with taking a break and walking away: I do it myself from time to time. At the end of the day, there are more important things in life.
Investing is emotionally hard, especially as a long-term investor when the market moves against you in the short-term. We all naturally want validation of, and feedback on, our decisions: we know that some will be mistakes, after all. It can be especially depressing when the market rapidly moves against you, especially when it’s a large negative move like with AMBA, because the early feedback is that it “looks” like a mistake. But short-term feedback is completely meaningless to your long-term goals, regardless of whether it’s positive feedback or negative feedback: it’s nothing more than noise. To be successful, we all have to find ways to recognize our feelings about short-term movements for what they are and set them aside. And again, maybe even taking a break for awhile if that’s what is needed to distance yourself from those emotions. Emotions will lead to mistakes (during both the good times and the bad).
The investing game is about setting out your long-term goals and then putting processes into place that allow you to cut through short-term distractions and achieve those goals. Those processes are going to be a little different for each person, as we’re all unique and have unique reactions to various situations. If AMBA is a business you want to own, then I think deleting it from your scorecard is a great move if that’s what helps you achieve your investment goals.
But first: is it a business you want to own? It’s hard to ride out rough periods if you don’t have conviction in your companies: if they’re just tickers on a scorecard. Buying a stock because you think it’s going to keep going up is a bad reason, even if Saul owns it or TMF services recommend it. Sometimes it’ll work out (and let’s be frank, with this long bull market it often has), but inevitably you’ll be disappointed if you’re buying based on short-term indicators (momentum, technical analysis, the arrangement of the leaves in your morning tea). You need to buy because you believe the company will continue to grow, reinvest in itself, and compound your capital over the long term. It doesn’t matter what the stock does in the short-term: in the long run, the share price will eventually move to at least roughly match the performance of the business.
Apple once again serves as a great example. While the business was never impaired, and management repeatedly explained exactly what was going to happen in the business and why (for multiple quarters ahead of time), the stock nevertheless dropped from nearly $100 (split-adjusted) in September, 2012 down to $61 – losing nearly 40% of its value – and took two years to fully recover and begin moving on to new highs. Two years! During a bull market! And what was it that finally turned the stock meaningfully around? A stock split! Something that had absolutely nothing to do with the business at all. If that doesn’t tell you how utterly irrational markets can be, I don’t know what will. You’ll drive yourself crazy worrying about what it all means for your investment, because there is no meaning.
When you buy a company, you need to be prepared that it will fall hard and stay low for an extended period of time, regardless of what the business is doing (and regardless of what you think the market should be “pricing in”). And as the Apple example shows, it doesn’t matter how high-quality the business is, or how bit it is, or whether it pays a dividend, or anything else: there is no escape from the market’s occasional bouts of insanity.
It could very well take a year or two for AMBA’s stock price to recover. Or it could happen next quarter (or even sooner). I have no idea. I don’t think you can even worry about it when you make a decision to buy.
Finally, one last point: we all know we’re going to make occasional mistakes with individual purchases, and so it’s easy to focus on those individual companies, but what matters to our wealth is how our portfolio as a whole is doing. The good news here is that the math is on your side. Here’s a quote from Peter Lynch in his book One Up on Wall Street (great book if you haven’t read it):
My clunkers remind me of an important point: You don’t need to make money on every stock you pick. In my experience, six out of ten winners in a portfolio can produce a satisfying result. Why is this? Your losses are limited to the amount you invest in each stock (it can’t go lower than zero), while your gains have no absolute limit. Invest $1,000 in a clunker and in the worst case, maybe you lose $1,000. Invest $1,000 in a high achiever, and you could make $10,000, $15,000, $20,000, and beyond over several years. All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.
If you don’t cut off your winners at the knees, that is.
So try not to stress about the individual companies, especially if you have conviction in the business. I know that’s easier said than done, but try to accept that you’ll be wrong some of the time and make a lot of mistakes along the way: the good news is that you can be wrong a lot and still do very well. I can’t even count the number of mistakes I’ve made, and continue to make (sometimes the same ones over and over – I’m dumb that way), and yet I still have trounced the market over the long term. Believe me, if I can do it, anyone can. It just takes time and an occasional willingness to step back and focus on the big picture.
Ok, enough rambling. I know you’ll do just fine, Karen, even if it seems a bit overwhelming right now. But do yourself a favor and turn off the talking heads.
Neil