05.10.2022
Six months ago today my portfolio had hit an all time high, up 1200%+ before a massive 10% one day drop on November 10, 2021. On that day, I was surprised, as it was the largest one day drop I’d seen since 2008. I was ready for it and rationalized that we could experience yet another 30%+ drop, as we had already had 6 times in the past 5 years. What I was not expecting (and indeed not many could have expected) was something more akin to the 2000 or 2008 drops that exceeded plunges of -50% in my portfolio, but this time around without any reasonable macro catalyst to recognize or provide advance warning. Indeed, we had already survived the Covid pandemic and actually done quite well through it, logging 1200% returns in 5 years…much of it in 2020 and 2021! What else could go wrong? The adage “Don’t fight the Fed” had been batted around CNBC for several months prior to this abrupt drop, but everything had just continued going straight up through November 9th. Perhaps that should have been the biggest hint. In hindsight, I now recall that drops greater than ~50% have seemingly happened about every 7-8 years since I started investing…1993, 2000, 2008, 2015…2022??? Yep…right on target, dang it! (Will 7 years from now in 2029 be the great Depression all over again 100 years later…or are we there now?)
I had raised about 10% cash in mid-October 2021. I knew better. I KNOW better! I know I can’t time the drops and wasn’t trying to this time either. I had embarked on a construction project and knew I’d need the funds for it and for the taxes on my 2021 gains. It was a prudent and fortunate move at the time. I waited through the drop in my portfolio in November and into early December, and then started to become excited for the opportunity to put those funds back to work after the drop. The construction project had been delayed and I had left the funds in cash for several months already. Surely the portfolio would start to recover. I started adding back to my great companies when we were down 20% from the highs. I continued to hold through December and January and then even rationalized adding about 5% on margin in a futile attempt to time the bottom and rebound even faster. Of course it just kept dropping. The war (yeah, sorry Putin…I have to call a spade a spade) in Ukraine. Skyrocketing inflation. Regular Fed announcements that they would do anything and everything to beat down inflation. Then contraction and reversal of the massive QE that had been spread around for years. I have this visual of the fed literally dumping massive tractor loads of cash into an incinerator to burn it. It has been perhaps the perfect storm and while it may all become crystal clear in hindsight, the recent massive serving of humble pie we have been force-fed has been a difficult pill to swallow and I too am guilty of trying to swallow it.
Legendary long time investors have one thing in common…they have survived and outlasted all the downturns in their lives in order to continue to be able to play the game, to invest and to compound their investments. Even good ‘ole Warren Buffett has professed to have been through quite a few 50% drops, but while he is often considered the best investor of all time, there are quite a few other investors who have a much better annual average (CAGR)…their only real disadvantage: They just have about 30+ years less timeframe for compounding than Warren. I read somewhere Warren made 90% of his current wealth AFTER he turned 50…yep…90%!! The lesson: Its absolutely critical to stay alive and not NEED to sell at the bottom. And it’s of paramount importance to invest in GREAT companies with solid fundamentals that will survive these downturns while having the conviction to hold your investments in those companies through the downturns in the valuations of your companies when Mr. Market and/or the government decide to create a man-made Bear market (and to be clear, I personally don’t think we were headed for a recession when this all started, but you can be sure we are now…but that is for another post). A great many investors do not have the mental fortitude when their investment is down 50% to hold onto a great company. Rational and irrational thoughts and emotions grip them in their fear and more often than not cause them to sell…all too often at or near the bottom. And that is often about the time things turn around and start to go back up. Are we there? Gosh, I wish I knew and could tell you. Perhaps. It may take awhile, though, but I’m certain this drop too shall turn. As long as you do not need the money and are not overleveraged so that you end up being forced to sell at the very bottom (don’t over-margin, borrow to invest. or over-leverage with options…because leverage is a great rocketship on the way up, but it is a massive anchor on the way down that will also plunge you further and faster to the bottom and all the way to zero if you’re not very careful with it), you will do just fine when your great companies continue to outperform internally and eventually the stock price catches back up to their ever growing fundamentals. Yes, that may take a year…or even 5 years from here…or more! That is what investing long-term and relying on compounding means. Time is the most important, critical and magical ingredient.
Meteoric euphoric rises…followed by abysmal and irrational dissents. I’ve seen at least four of them in 30 years. Two barely show up as a mere “blip” on a 30-year graph today.
The critical lesson: You have to survive to keep playing the game…that is the number one reason for Warren’s phenomenal success…longevity…time….surviving to keep playing another day and not being dragged to the bottom with no hope to get back to the surface. As for me, I could have played this one better. I could have reduced exposure earlier. I could have stayed on the sidelines with my cash longer. Coulda, woulda, shoulda…what I did do when I realized my mistake and realized this could be a longer and more severe downturn was position myself to wait it out as long as I need to do so. I hope for all our sakes this abysmal decline is near its bitter end and we can start a long ascent again. And I hope to see you all on the other side of this steep slope.
Cheers! -Poleeko
