Allow Yourself to Pick That Stock
Manage your emotions and learn along the way.
For many, an all passive portfolio is just plain dull. Sure, it chugs along and does its’ thing but where is the thrill? If you’re like me, you’ve probably wondered if you have what it takes to try active investing. You’ve likely pondered, “Perhaps, I can find an edge and eke out better returns for my efforts.” You may be right or you may be wrong, with the latter being more likely. However, if you just need to scratch that itch then do what I did. Carve out a small portion of your portfolio and dedicate it to experimenting with active investing. You’ll learn a lot about yourself while managing your risk.
Take the Plunge
Just over two years ago, I decided to take the plunge and bought my first individual stock. Armed with the information I had absorbed from countless value investing books, I obsessed over screens and finally identified the perfect stock: one that would even make Benjamin Graham salivate — or so I thought at the time.
The company’s fundamentals were attractive and all signs pointed to an irresistibly underpriced stock. But let’s be honest, the stock was not in an attractive sector: paper and packaging. No wonder it was so underpriced I thought. Luckily, I made sure the stock made up no more than three per cent of my portfolio, enough to satisfy my craving without devastating me if I was wrong.
Skin in the Game
An interesting phenomenon happens when you have something on the line. You start to dig deeper and develop a keen eye. When it comes to a company’s performance, every press release, earnings report, or rumor will demand your attention because you have taken the honorable step of taking a position. Nassim Nicholas Taleb captures this sentiment quite well, “How much you truly believe in something can be manifested only through what you are willing to risk for it.” By conscientiously taking on risk, you become truly invested.
Spectrum of Emotions
Even though my position was small, I still felt the market’s movements and thereby experienced a spectrum of emotions.
Shortly after purchasing, the stock price popped. I felt like I had outsmarted the market and in record time too. I began to wonder if my allocation was too small. Maybe I should have carved out a larger position? What’s the point of such a minuscule win?
Little did I know, this feeling wouldn’t last long. After holding the stock for a couple of months, its’ price began to spiral down. The news wasn’t good. Unexpected fires had set some of the packaging plants ablaze which brought down revenues substantially. Simultaneously, company insiders began dumping the stock too — putting additional downward pressure on the stock’s price. At this point, I was down about 50 per cent. Seeing all this bleeding began worrying me. Even though I believed all of these events were temporary, I was glad I didn’t take on a bigger position. Perhaps you’re the type of person that would buy more under such circumstances. I for one was glad I didn’t.
This is the point where you begin to contemplate selling. Luckily for me, my position was so small that the temporary damage was mitigated by my other holdings. Yay for diversification! Over the course of the next year, the price began to climb ever so slightly, although it didn’t crawl back to anywhere near my purchase price.
I began to think that the stock would never climb. It didn’t seem to fall further which was a relief but the stock moved sideways for some time which was definitely not reassuring. At this point, my ego got in the way. Instead of selling and moving onto other opportunities, I held on. I didn’t want to crystalize my loss and admit I was wrong. This is a very common attitude in investors, and once I didn’t imagine myself going through. The market always finds a way to humble you.
“I’ll just keep this stock in my holdings as a reminder for how things don’t always turn out as expected,” I thought to myself. After several more months, the whole world spiraled into chaos. Covid-19 had made landfall in North America. People were utterly obsessed with buying toilet paper and it seemed like cardboard boxes became the container of choice for all of our delivered essentials. These trends were huge tailwinds for the paper and packaging company and were sure to drive revenue through the roof. The company’s CEO could hardly suppress his overwhelming delight on the company’s Q1 conference call. Despite the worldwide macro situation, I began to feel lucky again.
The stock steadily crawled back to my purchase price and beyond. The strong fundamentals I had looked out for two years ago were suddenly fashionable again. Once the stock price overshot my purchase price, it was time to sell. After the two-year odyssey, I barely eked out a return, but at least I was in the green.
Lessons
Most investors don’t beat the market. Looking back, at my value pick, I surely didn’t either. With that being said, if you’re just starting out, it doesn’t really matter. Taking the plunge from passive to active investing may not necessarily reward you financially. In fact, you can very easily shoot yourself in the foot. However, by allowing yourself to have skin in the game, you become incentivized to pay attention. You’ll be swayed by emotions and experience both highs and lows. At first, you may be startled with your own reactions and thoughts; a normal experience when one is humbled and growing. Over time, however, you’ll come to grips with your feelings and have a better understanding of your own risk tolerance and temperament. By taking the plunge, you’ve put yourself on a path toward self-discovery. What you uncover is your reward.
