Many of my posts tell a positive story. I talk about companies in which I’ve invested that have grown significantly. I talk about the wealth-building powers of compounding and the long-term gains of the S&P 500.
The reason I focus on this is that with all the doom and gloom news, it’s easy to stick our hard-earned money under the mattress and hope for the best. Rather than take a risk of investing, wouldn’t it be safer to hold onto those savings, especially when a high yield savings account will get me 5% per year in interest?
The reality, however, is that in order to be financially secure, we need the outsized gains that equity investment can provide.
Volatility
Equity markets – think S&P 500, are volatile. While we think of volatility as huge drops in the market that wipe out months, or even years of gains, over 10-20 year periods, that same volatility has tended to provide the S&P 500 index with roughly 10% average annual returns with dividends reinvested.
Equities
The word equity means ownership. When we hold equities in our portfolio, we own small pieces of companies, or we hold shares of mutual funds which hold shares of companies on our behalf.
While I own a good chunk of S&P 500 mutual funds, I own shares of over 60 individual companies. Read my post on creating a thesis to learn more about how I choose these companies. Also, check out my posts on reading company annual reports here, here and here.
Winners
I write a lot about my winners – Apple, Amazon and Netflix. It’s not that hard to find great companies. But, we’ll also make mistakes. For every Apple, Amazon and Netflix, I’ve had a few Intels and Lemonades. There tend to be fewer winners, but the gains of the winners usually far outshine the losses of the losers. And typically we have enough evidence that a company is a loser before the company goes to zero. Read my post here on how/when to make the tough decision to sell.
Arista Networks
Arista is one of my favorites. I bought shares in 2017 for the first time. These shares are up over 600%. I have 2 subsequent purchases in 2018 that are each up over 500%. I bought additional shares at higher prices than my initial purchase because I was optimistic that growth would continue.
A few months back, I wrote a post about a rough day in the market. I noted that my favorite, Arista had pulled back 10%, and while this seemed like a big pullback, the share price had been increasing rapidly over the last week or so, so the 10% drop brought the price down to where it was roughly a week ago.
My advice: This was not a buying opportunity.
Arista was at $254 per share on that day. It is $380 a share today. That’s about a 50% gain in a few months.
I was wrong. Maybe it was a buying opportunity.
OOPS
Putting a $1,000 into Arista rather than choosing to write this off as “not a buying opportunity” cost me $500. And maybe more if Arista continues to grow as I expect it will.
Unlike the Fonz, I can say it. I was Wrong.
Does It Matter?
Yes, sort of. The Arista miss is a very real $500 I could have had right now. Holding Lemonade (LMND) as it dropped from an average cost of $80 per share to an average sale cost of $19 per share hurt. That was real money out the door.
Don’t Beat Yourself Up
I’ve written several posts on keeping score (here and here for example). I have a spreadsheet for everything and I analyze my performance. But there is a difference between learning from our mistakes and agonizing over them. Learning = good, agonizing, not so much.
We’ll all miss a huge opportunity like the Arista mistake. We’ll all hold onto a company we believe in too long like I did with Lemonade. We’ll put a pile of money into an S&P fund right before a pullback.
We learn from our mistakes and we do better next time (usually).
We don’t need to catch every great opportunity. One or 2 can build tremendous wealth over time. Buying the S&P 500 at the wrong time will likely correct itself over time. It always has in the past.
And our mistakes can only go to zero. And while that hurts, our best picks can double many times over.
Wrap-Up
Today, I was taking a look at Arista because I like to refresh my perspective on all the companies that I invest in every once in a while. While I was very happy with my results and with the company’s future prospects, I couldn’t help but remember the post I had written a while back.
For me, it is important to keep score and to continue to challenge my decisions. I learn a lot. A company can be a compelling opportunity even if its share price is rising. We tend to focus on share price because it is obvious. It’s easy to find and it’s east to track its history. It’s nice to buy a company on sale during a pullback, but there are many other indicators of value or potential.
But back to mistakes, we all make them, and we’ll make more. They hurt when they happen, but if we do our homework, and we diversify our investments, we’re likely to do well in the long run.