Bumpy ride of stock trading, part 2
Early in March I wrote a post about stock trading and its volatility. It’s a quick read if you want to brush up real quick: https://medium.com/@laimis/bumpy-ride-of-stock-trading-95dfee8f762a. How little did I know how bad it would get. March 9th was just a start of a deep crater and I was just living in the moment without any idea how the situation will develop further.
Carnival, after publishing that post, continued to drop. It was high teens, and then all the way below $10 per share! The news kept getting worse. The cruise line stocks were the least of our worries — the lock downs started a week or so later in the US and for about a month and a half you had nothing but bleakness staring at you.
Living with uncertainty while getting pummeled by negativity
In times like these is when your preparation, life style, and execution matter the most. These are critical moments and how you live and react to situations can make a huge difference to your life — financially and emotionally.
Crucial step: avoid the media
My number one action taken during that time: reduce/eliminate news and social media consumption as much as possible. You don’t necessarily have to stop using twitter, but removing negativity by muting or unfollowing people that cause angst or just love to create noise when opportunity presents itself is the way to go.
Traditional media and online media sources are the biggest enemy of an educated and effective society. They are worse than social media networks. They are hubs of noise designed to suck you in and keep you there for as long as possible without any accountability or skin in the game on their part. You must absolutely 100% ignore media during the dark times. The purpose of their existence is not to educate and inform, it’s to scandalize and create stories. Media are writers of fiction stories that use true facts to create false narratives that adhere either to outlet’s agenda, an individual journalist’s agenda or to support “beefs” that they might be having with someone else. You just don’t want to be part of this.
They are worse than your neighbor that’s passing along anecdotal evidence. They pass long anecdotal evidence while masquerading it as an absolute truth backed by evidence and expert opinion.
I am sure there are good media members out there, but all of the media members added together is a significant drag to the society.
What you do before volatility begins matters the most
When cratering begins, what you did prior to that is what makes the biggest difference. What you do during the crisis matters, of course, but how difficult the crises is depends on how you lived before it started.
For examples, as layoffs and reduced salaries kick in, having savings is a huge psychological relief. “OK, I can survive x amount of time”. If you are one of the few lucky ones that does have savings and income, this is the time when you can help the most. I ran into a post of a single mom with two kids on one of the fundraising sites wandering how she will survive the next two months and contributed donations right away. She gets the money to carry on, I get the feeling of strength from helping others. Not only you feel safer, but you feel stronger — all while living in a volatile and dark times.
For investing, if you followed a risky strategy and bought stock on a margin with a strategy that required their prices to go up and no ability to cover the loss — you got wiped out.
If you told yourself, I can keep this stock for 6 months if it goes down but if you are not strong in your convictions — you panicked and sold. Trust me, it’s very easy to do. In my case I was staring at my experimental portfolio that’s down 36%, and I am just starting out. Here I am, rookie, running an experiment, and so far on paper I am down about 10% of my yearly income. That’s not a small amount of money. How will you react? I stayed steady but keeping emotional stability and positive outlook was not a given. You accept the situation and stay the course.
When you bought the stock, always consider the case of it falling — will you average down? It’s really hard psychologically to do when the prices are falling an there is no end in sight. If you planned properly, you start to average down and if you did the calculations beforehand, you averaging down will be more effective. You will follow the plan instead of just simply reacting. What makes it harder is that you have to mix “following the plan” and “reacting” strategies together. Your plan might not have considered such a steep drop. You might have to adjust the frequency of averaging down based on the number of positions that you have and their sizes, etc. You have to be nimble.
And I can’t tell you enough how hard it is to receive a pay cut, and then take some of that money and use it for averaging down while again if you looked at the news there was nothing but negativity all around you. Just ignore the noise and go with your conviction.
Diversification is key
Again, what you did before the drop is what matters. Were you diversified? If yes, there is a good chance the drop wasn’t as bad once the initial bottom fell out.
In my case, I had a mix of 7–8 securities that were across several sectors and once the bottoming slowed down some of them started to show life. This kept the overall drops small and soon enough a rise began.
You need to identify which one of the securities seem like the best fit to survive and make sure to average down those holdings the most. You also have to identify the riskiest investments and ensure that what you put in there is not half of your portfolio, that sort of thing. Spread the money in a way that has the highest impact when rebound starts AND if the stock gets completely wiped out.
Adjust your strategy
Prior to the fall I was mostly selling covered puts and calls. Yes, that, and started to make around 10% of my day job’s paycheck. I was really happy with the results and was looking forward to increasing the amount invested.
Of course the crash happened and the strategy of selling calls and puts is unusable in such environment. The drop actually would have destroyed me if I did not follow very strict principles early on: only dealing with securities I don’t mind outright owning, diversifying, never putting more than 15% in a single security, and NEVER trading on a margin. If I would have skipped on any of these rules, especially the margin rule, most likely I would have been wiped out.
But once the strategy no longer is appropriate, you just have to adjust. I stopped selling options, got out of one at a loss, got assigned on others, and just averaged down the positions with cash that I had in the trading account. And while doing that, I started to pick up some of the biggest drops that made no sense to be drops — those rebounded pretty quickly and provided more income once I sold them. It was a griiiinnd, just a daily/weekly “evaluate/strategize/act/adjust” cycle.
Where is Carnival now?
The stock market started the rebound in May. Actually in April I made the most money I had made investing. Not on paper, but real gains. Then May was another record month. Carnival is at around $22 at the time of the writing. My first purchase of it was at $32 but during the drop I continued to average down and now I am up much more than I thought I would be and close to the exit point.
It’s not over yet, not even close. The drop might come again. But you continue to plan and execute and take the exit when it hits your exit criteria. Just keep on grinding.
