August of 2008 is vivid in my memory. On a crisp fall morning, I had just made my largest purchase yet of a single stock. I had been following the market for months and thought I knew it all. The S&P had already fallen by about 11.5% for the year from a high of 1447 in January and I was confident that this was a great buying opportunity and that the bottom was near. I was an expert in predicting the market.
I was in the Bay area in California and was closely tracking the technology stocks. The air in Silicon valley had a magic of entrepreneurship and innovation and is the true embodiment of people living the American dream . There was a sense of optimism which is infectious and the belief that nothing is impossible and no matter where you are from, you can dream the impossible and change the world.
Earlier that week, while on work I had a series of business meetings with few directors at Apple at their headquarters in Cupertino, and the sense of optimism and overconfidence in my knowledge of technology stocks and market trends got hold of me. I decided to bet on Apple and logged into my Fidelity trading account, clicked buy and placed a order for $10,000 worth of Apple stock at a price of $21.30 per share.
This was my entire investible fund . Just after I clicked on buy, I started getting buyers remorse even before the trade had executed. Had I done the right thing? This was a lot of money.
2008 had begun on a shaky note but little did I know that the year was to turn out as the worst year for the stock market. In March Federal reserve had to intervene to save Bear Stearns ( Global Investment bank based in NY) and few months later Freddy Mac and Fannie May, ( government institutions who provide liquidity to the mortgage market) needed a government bailout.
A month after my purchase the financial crisis worsened. In September 2008, Lehman brothers collapsed and the Fed announced that it was bailing out insurance giant American Insurance Group. End of September was the 2008 stock market crash and the Dow Jones Index fell by 777 points – the largest in its history. 2008 was to end as the worst year in history for the stock markets with a negative return of 37%.
I watched with concern as the price of Apple stock fell in the week following the purchase. My concern quickly turned to agony as the price continue to spiral downwards in the following weeks. By the third week of December, apple stock price had fallen to $10.8 per share eroding more than 50% of my investment. Now my agony turned to full on panic and I did not see a bottom to the falling markets.
I now made the classic mistake which has robbed retail investors of trillions of dollars. During the last week of December as the price continued to fall, I wanted to cut my losses and logged into Fidelity and clicked on SELL. My notional losses had now become real. I just lost $5000 in five months. Just like that my dream of retiring and traveling the world was consigned to the transaction reports of my Fidelity brokerage account.
That brings us to most important Lesson for building long term wealth.
Investing is a marathon. It is not a sprint
I am a long distance runner and completed the Chicago Marathon last year. This was probably the most difficult thing I have ever done in my life. I had to endure the pain and keep my focus on the end goal. How fast I ran was not important, but what was important was to stay on the course and complete the whole distance of 26.2 miles.
Successful investors are like marathoners, they must be resilient, disciplined and focused in order to complete the race. Short term investing is like sprinting and is a different sport. In the investment context Sprinters are focused on the one year time horizon whereas the marathoners are focused on the 10 or even 20+ year time horizon. The sprinter has a roller coaster ride with his returns swinging dramatically on the positive and negative side but the marathoner always ends up with a positive return and significant increase in this assets after the 20 year period.
I was the sprinter in 2008, when I panicked and sold my shares after less than six months. The sprinter is emotional, checks his portfolio frequently , easily panics and makes mid term corrections which has a significant negative impact on the value of his portfolio. The sprinter is impatient and has a tendency to extrapolate short term changes in the business or political climate and is overconfident on his ability to predict the course of the market.
This is hazardous to the financial health. Yes that was me. Ben Graham , the father of value investing once said “Individuals who cannot master their emotions are ill suited to profit from the investment process”
Warren Buffet said “The stock market is a device for transferring money from the impatient to the patient”
Time in the markets is more important than timing. The chart above from Forbes drive home the point. Rolling returns over 20 years are in the 6-14% (annualized) range and the short term gains look insignificant in comparison.
Any marathoner will tell you that with enough discipline, effort and persistence, human beings are capable of achieving anything we put our minds to . It begins with breaking seemingly impossible goals to manageable short term objectives, stay committed to the process and trust that each seemingly insignificant step brings you one step close to the end goal.
Remember 2008 any my panic sale of Apple stock? So what was the financial impact of my “sprinter” type behavior of 2012. I lost $5000 of my hard earned money. I was treating the stock market as a gambling machine and was foolish in my overconfidence of predicting the market. More importantly I also lost a tremendous opportunity to receive stellar returns over the long term.
From a low of 860 in December 2008, the S&P 500 has more than tripled now to 2750 in Feb, 2019, providing negative returns for only 3 out of the 11 years in consideration.
What would have happened if I did not do anything in December 2008. What if I was plain lazy or had a memory lapse till 2019. Based on the apple stock closing price of $172 on Feb 13, 2019 , $ 10,000 invested in Apple stock in 2012 would have grown to more than $92,000, increasing more than nine times!!! (excluding dividends). Expensive lesson indeed and this changed the course of my future investments in the stock market. For the better. For more stories on personal finance read How to save a million and reach financial independence.