Drawdown Thoughts
Drawdown Thoughts
A piece with a timestamp, current state of mind, and a healthy reminder
Let’s talk about the book.
There are currently 10 positions in the portfolio. They range from being up 1% to down 40%. Most are down 20% to down 40%.
Drawdowns for me are a cocktail of stress testing the idea for conviction and the ability to add on at better prices. I saw what lack of conviction can do back in the late fall when I doubled down and immediately felt that the position was too big. I took a small loss and allocated it elsewhere. For a long time, I prayed the prayer that was concentration and sometimes took it to an extreme. I got lucky a few times in a row and fell victim to the winner’s curse and overconfidence. Lucky for me, I got smacked around before I was investing bigger sums and learned that even just opening the door to a few more ideas, reduces path risk significantly. Survival is more important than returns.
When Russia invaded Ukraine I had dry powder to use and used it. I’ve been trying to get better at slow playing and being relaxed when I see prices drop. I could get a little too excited in the past, suffering from the recency tendency of rarely seeing lower prices, and acting like a starving person around food. You take all you can, as fast as you can. The quote, “When it’s raining gold you run outside with a bathtub, not a thimble” stayed in my mind and I might have taken this too far. It’s one thing to invest slowly when you actually have enough money to move markets but when you’re a small guy like me, I can go all-in with one press of the button.
The term premature accumulation is accurate. I see low prices, get excited and start buying. We saw a huge run-up in 2020-2021. This correction and drawdown aren’t a surprise. The old saying of what goes up must come down always tends to prove true. We might be near the bottom, or not, it’s not a game I want to play. I just want to own great companies at really good prices.
Right now, I’m tapped for cash. All of my investable money is in stocks and some options and the family fund has been fully invested since the middle of May. It pains me to see the better prices today but I thought we were getting good prices last month too. We don’t know what the next couple of months looks like. Do I wish there was still some cash to keep investing at better prices? Absolutely. Will I ever be able to call a bottom? No.
The positions we hold now are down and as we keep moving more to the downside I have not felt a loss on my conviction, the opposite seems true. Seeing a price get crushed does cause a gut reaction of “questioning” but I remind myself within the same minute I don’t look to the market for direction. I look to the market for opportunities.
There is another thought that I have been keeping at the forefront of my mind during this time. Being under stress puts our brains in fight-or-flight. It’s easy to be a “long-term” investor with a 3-5 year time horizon when the market is crushing new highs every other week. When it draws down, however, that time frame shrinks. We start to ask, “I might wait for the waters to calm a little before I buy more.” Or “I think I will be able to get a better price tomorrow”. What happened to the thoughts about the market share, competitive advantage, customer demand, and what the economics look like in 5 years? What happened to the big questions? These are the ones that drive the investment right?
If there is anything I have been able to comprehend during the 7 short years of my investing it’s a deep understanding of a Carl Icahn quote: “You make the money buying things when no one wants it”
Stocks, as a whole, are not in a favorable light by the investing public. It’s easy for me to gauge the temperature because I had a buddy, with no investing knowledge, text me, “The market is spooky right now”. Yes, my friend, it’s definitely spooky.
As of this writing, the S&P is down 22% from all-time highs. A lot of my new positions are ones that were down 50% from their respectove highs and have fallen lower since. The interesting part, we might have further to go. This might be the start of a prolonged bear market. We might not see the S&P hit a new high for another year or two. I mean, seriously, we are only down 22%. I haven’t invested in a market down 50% from highs, one day I will, we might be headed there. I don’t know.
At the end of the day, the companies that are in the portfolio now might have been purchased at a less than fair price, the conviction for each of them remains strong and I like the 3-5 year prospects. I have no dry powder left, there might be some after I save up some more but the work has been done and it’s time to do what we as investors are really paid for, waiting.
Stay Strong.
Peace and Love,
Michael
Please be advised, Wall St Gunslinger is not an investment advisor and does not give personal investment advice. All content is for educational and entertainment purposes only and should not be interpreted as anything other than such. Investing entails a lot of risks and should be managed appropriately. Please do your own research and consult with an investment professional before making any investing decisions. Thank you.