If you have been investing in the stock markets for a reasonable amount of time, you would be familiar with this quote from Warren Buffett:
"The first rule of an investment is don't lose money. And the second rule of investment is don't forget the first rule. And that's all the rules there are."
As simple as it sounds, many first-time investors who begin their journey into the world of stocks struggle to adhere to it. I was no exception. As the world plunged into a global crisis in early 2020, I found myself in a personal crisis, with a huge unrealised loss on my options positions and utterly unsure about what to do next. The human ego has a strange way of causing us to avoid seeking help and trying to resolve many things on our own, and I succumbed to that. I was too embarrassed to share about the few huge red positions in my portfolio and just decided to close them and put a stop to all the terrible scenarios that was playing out in my head. After that nerve-wrecking experience, I stopped investing for a few months, feeling like such a failure that my first encounter with the stock market was such a hopeless one.
Ever since that incident, I went on to learn many other lessons, and some were quite costly too. When I resumed investing in the second half of 2020, everything seemed to do well for the next year or so. The companies that I bought seemed to be on a tear, reporting stellar results quarter after quarter. A number of stocks in my portfolio doubled, and some even tripled from my original buying price. However, the music stopped in 2022 as interest rates started to rise at an increasing rate. Prices came down and I thought they were opportunities to accumulate more, but then they just kept dropping and dropping. Within months, all my unrealised profits had vanished and I was in the red once again. All of these should not be cause for concern if I had built my portfolio in a carefully diversified manner, but alas I had bought into the hype back then for unprofitable, loss-making tech stocks, and at one point ran a super concentrated portfolio of just 4 to 5 stocks. The greed from the earlier run-up consumed me, and I thought I was going to double my money again in the next 1-2 years.
At this point, it simply seemed like I was not cut out for investing. On hindsight, I realise it was because of a few things.
1) I succumbed to greed I had the wrong perspective about the stock market and my earlier experiences impressed on me that it was really easy to make money. This was made worse when I added to companies just because prices were dropping, thinking that I would hit the jackpot once prices rebounded to all-time highs. My motivations eventually got me into more trouble.
2) I succumbed to pride Reading about how Warren Buffett ran a concentrated portfolio and made huge gains amidst the backdrop of the rising market in 2020/2021 made me think that I should emulate his investing style. Afterall, holding too many stocks in your portfolio is "diworsification" right? It's a phrase coined by Buffett to say that having too many companies will severely dilute your returns. The only problem with this thinking was that I wasn't Buffett, and thinking that I could replicate what he did only boosted my ego and not my returns. I have since come to learn that his style of investing is not for me. Peter Lynch had hundreds of stocks in his portfolio, and yet he could also beat the market. It is more important to recognise humbly our own limitations and tendencies and adopt a style of investing that we can stick with in all market conditions.
3) I succumbed to over-confidence To add on to my previous point, I once bought into every company thinking that all of them have potential for high growth. I have since accepted that there are many things I do not know about the market and the companies I buy. I don't know what I don't know. Hence, even though I do my best to research and build conviction on the companies I invest in, I recognise that I could easily be wrong in my assessments. In my opinion, this is probably one of the most important reasons to construct a diversified portfolio. There are at least 2 immediate benefits when I do this: 1. If my assessment of a company is wrong, my portfolio doesn't take a huge hit and go to ruin.
2. In moments of opportunity, I can recycle my capital within my portfolio by selling off lower conviction stocks and adding on to my higher conviction positions
Since early 2023, I have started from scratch and built a new portfolio mainly focused on income. So far, this portfolio hasn't been "tested" yet as I was blessed to begin it at the onset of the next bull run. The true resilience of a portfolio is only seen after going through a bear market. But I am still pleased with the dividend progress I have been making so far and am on track to hitting 4 figures in the third quarter of 2024. In my next post, I will likely share how I built this new portfolio and some of the guiding principles I use. *This officially marks the end of this 3-part series. If you have any feedback or comments, feel free to leave your thoughts below or drop me an email at financialpilgrim55@gmail.com.
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