On January 11, 2016 I sold 6.5% of my MSFT stake to buy ADBE. I thus somewhat more than tripled my stake in ADBE, which nevertheless made up only 5% of my portfolio as of 12-31-2016.
The timing and pricing of this trade was as follows. In August-September 2015 the market sold off by 10%, then recovered, only to sell of by approximately 12% in January 2016. ADBE had bottomed on 8-24-2015 at 75, down 13% from its previous peak at 86 on 8-17-2015. It then rose again to peak at 95 on 12-29-2015 before falling 22% to nadir at 74 on 2-9-2016.
I bought ADBE at 88 on 1-11-2016, down less than 8% from the 12-29-2015 peak of 95.
In fact, since 1-11-2016 MSFT is up 20-83%, ADBE up 19.56% as of 1-18-2017.
But MSFT pays a dividend of 2.35% currently, That trade isn’t looking too impressive. Bear in mind of course that the prices of both fluctuate, so on a different date, the assessment would be different.
Had I bought at the nadir of both stocks with MSFT at 75 and ADBE at 74 on 2-9-2016, since than ADBE up 46.24, MSFT up 26.89 not counting dividend, as of 1-18-2017.
The rationale for the trade was that ADBE is a high PE stock with expectations of high future growth which have become well recognized by the market. This type of stock rarely trades at an attractive, relatively lower purchase price. I wanted to increase my holding of ADBE and wanted to take advantage of a lower price. I still agree with the decision to increase my holding of ADBE, but obviously I totally missed the true opportunity for a better price.
This episodes proves again two timeless investing truths. First, it is true that valuable and expensive stocks will be available at a better price, if you can only be patient. Second, if you feel impelled to do something less you run out of time, just again, be patient. In fact using more time to decide will result in a better outcome. This is not the only time that it would have been more profitable for me to wait for a better price. In fact it is a recurring theme.
But upon reflection, I find that this conventional lesson only probes one layer of this experience. A distinct lesson is provided by considering the emotional aspects of the trade.
First, I felt I was missing out by not owning more of ADBE, a wonderful company with an insurmountable competitive advantage in its business (digital media) which it is strengthening, while building a second business (digital marketing) which looks likely also to have a sustainable competitive advantage. This created a sense of urgency to trade.
Second, since I held no cash, I needed to sell another holding to buy more ADBE. All of my 5 stocks are treasured holdings. Part of holding such a concentrated portfolio is the nagging thought that perhaps I should be more diversified, at least within my 5 holdings. This added to the anxiety surrounding the trade; on one hand, I should trade into ADBE, on the other hand, I was reluctant to sell my other holding.
the emotional aspects of investing must be explicitly embraced and addressed, rather than just suppressed. Same as in the rest of life. Remembering that good investing is a model for a fruitful life, lived to its fullest potential.
In perspective, the sum of money used for this trade was a very small proportion of my portfolio , less than 3%, as to make only a small difference at best. This suggests that instinctive fear led me to avoid putting a healthy proportion of my portfolio on an investment.
Regarding strategies to reduce the roil of emotions interfering with sound trading next time. One suggestion is to create a relatively fixed, preplanned trading strategy.
For instance, wait until it is reduced 10% from the peak and use half of the money available for the sale. Then use the rest when or if the 20% discount is reached.
This assumes that you really want to own the company. If it is a new investment that may not have the same conviction as a better understood, long term holding, then waiting for the full 20% discount is probably best.
Second, in order to isolate the decision to purchase from the reluctance to sell a current holding, it would be helpful to have a source of cash for new purchases. This is the topic of a subsequent post.
The lesson to be learned from this episode is not just that patience is a virtue in investing. For the barrier to patience is often posed by the emotions impelling a trade. One cannot simply make one’s emotions disappear. I for one, have been successful in making them disappear so far, and I am surely not alone.
A better approach may be to 1. analyze the source of the emotions. In my case, my rush to trade and poor decision making was not simply from a greedy rush to chase a hot stock. By understanding the source of the feelings, you can know how to neutralize them. 2. have a strategy to avoid a repetition. For example, I will trade at specific target reductions in price, and not worry about trading until then, merely watching the market prices regularly. I know my portfolio is sound as is, there is no urgency to trade unless it is actually at an attractive price. 3. have a source of cash for purchases. Again, this point will be the subject of a different post.
In sum, the emotional aspects of investing must be explicitly embraced and addressed, rather than just suppressed. Same as in the rest of life. Remembering that good investing is a model for a fruitful life, lived to its fullest potential.