Stock Prices

When a stock you own drops 25% it's an "opportunity". When it drops 10% more you call the CEO to verify the thesis and buy more. When it drops 10% more you get annoyed insiders aren't buying. When it drops 10% more you sell your stock to the investors that are going to make money on the stock.

Think about all the stocks you said you would buy if they ever dropped to a certain price.  

When the stock price finally drops, you quickly pivot, "ehh.. maybe I’ll buy it 10% lower". You do this three more times. 

Watchlist companies = a list of stocks you tell yourself you would buy if they drop, but when they do drop you never buy them. You just watch them. 

Then the stock bottoms and starts to rise. In an instant you mentally shift from “fear of loss” to “fear of missing out” and you take offers in the stock chasing it 30% higher to get a position.  

Stock prices pull on our emotions like a dog on a leash. We all suffer from stock prices driving the narrative in our mind.

The truth is when a stock is down, many times nothing fundamental has changed. It’s simply the market sentiment flipping or a large holder selling. 

When a stock moves up, many times the business really hasn’t changed. Investors just got more excited about the story. 

When stocks go up everyone is willing to look the other way on almost any issue. When a stock is rising investors pull out a telescope from the closet, climb onto the roof, and look way out into the future to justify paying a higher valuation today. 

When stocks go down the telescopes turn into microscopes. Everyone focuses on next quarter and all the little cracks in a thesis that were always there are now obsessed over by everyone. A high share price forgives all ills, and a low share price magnifies them.

Stocks that were loved 100% higher are hated 50% lower. Many times, nothing has materially changed with the business. The stock simply went down and that changed the narrative. 

Think about the stock in your portfolio that is up the most YTD. You immediately think – “Quality business! The best management team I own.” 

Most investors definition of a quality business or quality management has nothing to do with quality - it’s simply the stock you own that is up the most in the last 12-months.  

Successful investing has always been a game of separation. You must separate the business from the stock price and the short-term stock price direction. You can’t let a rising stock price make you believe the business is better than it is. You can’t let a descending stock price make you believe a business is worse than it is. You must stay grounded in reality.

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