May 30, 2020
We’ve all done it, it’s too tempting. I honestly can point to plenty of investments where I probably am doing exactly that. But I’m trying to get better and that’s what matters, right?
Right?
It’s great, but what if I can get it cheaper?
I’m going to implore you to remove that phrase from your vocabulary right now. There are many technical reasons why exactly you probably won’t buy at the bottom and sell at the top, and even saving 20% on an initial investment in amazing company could really not mean much in the long term.
But because of compound interest you may wonder if saving more now means it’ll compound that much in your favor on and on. Wondering if maybe that way you can make that much more of a difference in your investment. And while that thesis is completely fair, it almost never happens, in fact most of the time when you wait for that perfect opportunity to buy into a company, it doesn’t present itself until far after that amazing growth story is underway.
I’m not going to go through a bunch of statistics, instead let me talk about my own, painful experiences where I tried to wait for the right time to buy a company. Hopefully you can learn from my mistakes and skip straight to the method I have had much more success with over the past year. Sit back, relax, and enjoy as I share times I sat on the sidelines, watching amazing companies rise, all because that moment “wasn’t just right.”
It’s nearly $700 a share, it’s been on tear it’ll drop soon
This happened about four years ago, before I understood the importance of looking at the market cap of a company in order to evaluate potential as opposed to that $700 price tag. If I could go back to June of 2016 when I said that about Amazon, I would slap myself.
Yes, THAT Amazon. The one sporting a freshly minted $3,000 share price.
Now you may wonder why I didn’t just suck it up and buy it at $700, or $1,000 for that matter, and the answer is simple: if you sit there assuming the share price will be corrected then you won’t buy. I wasn’t looking at the massive opportunity, I was looking at what analysts were saying, I was looking at the share price, I was looking at recent outperformance as a bad thing.
I thought I had missed the opportunity for the insane growth from a company I thought was a cut above the rest, all over a few dollars on the share price at the time.
Suffice to say that Amazon has since grown more than 4x that price, and still has room to grow and I have yet to buy a single share.
By hoping for about 20% savings, I missed out on 329% of growth.
Before “Zoom” was a verb
You may have noticed that Zoom has slipped into the lexicon of the average American. As a general rule of thumb that tends to go hand-in-hand with strong share price appreciation. For a frame of reference, “Let me Google that really quickly,” is more often stated than “I just gotta Exxon my car first, then we’ll be on our way.” And the share price really reflects that.
Well, that’s yet another painful missed opportunity.
Last summer I listened to a compelling interview by Zoom CEO Eric Yuan where he explained the amazing tale of why he invented Zoom, and how its video-first platform allows for a better user experience than any other software.
I loved the company but thought the roughly $90 price tag was too much. Obviously, the company had gotten ahead of itself. I watched it drop in share price as low as the low $60s, and I still didn’t buy. The company had dropped 30% but I figured it could continue to fall and I’d scoop up some shares. While yes, the world has gone through conditions that would accelerate Zoom’s adoption by the average consumer, the point is I missed each percentage point of that 195% growth in the span of one year from that $90 price tag.
You’d think I would have learned
The fact is, it’s hard to not try to time the market. It’s something I have to consciously do each time I invest. There are plenty of companies I love for the long term that I still haven’t bit the bullet on yet and I missed a wonderful amount of price appreciation.
Growth stocks in particular tend to be volatile so it’s hard to convince yourself to dive in, knowing that your investment could spend months well below the price you bought it before that growth occurs. Some of my favorite companies will spend weeks or months 20-50% below the price I bought at before any of that amazing growth happens, and honestly, it’s painful. I spend months researching any given investment before I pull the trigger so watching an investment immediately drop 10% is awful. Studies have shown that the pain of a dollar lost is significantly larger than the joy of a dollar gained, so it’s natural to want to reduce your risk.
The simplest way to view a company you love, that has experience strong share price appreciation, when you wonder if it can continue: if a company experiencing a consistent level of outperformance, it often has to do with the company doing something right. I encourage you to bite the bullet on those companies you admire, so you aren’t griping into the ether of the internet about missed opportunity.
The Happy Ending
There has to be a happy ending to this, otherwise I wouldn’t have written an article about an alternative, and here is my favorite example. I bought Shopify at a then all-time high back in February. Since then there has been a pandemic that caused its share price to immediately crater as much as 42% just weeks after my initial investment. Now that was incredibly painful, I started to think I should have just waited and probably never bought. Well I am happy I did, even though I bought at the then all-time high I have since earned an 84% gain in the span of just under 5 months.
And I don’t think that is too shabby.
What to Do to Avoid Making the Same Mistakes
Now what I do is something called dollar-cost averaging. It is incredibly simple and has since saved me countless headaches from the stress of trying to time the market. Once you decide the companies you want to invest in, (after thorough research) start a small position, with the goal of growing it systematically and unemotionally. With each paycheck put a bit towards the companies you want to hold more of. The theory behind this is you will sometimes buy low, sometimes buy high, but with a good company over the long term, this won’t matter. Remember, missing out on 20% is much better than missing out on 329%.
If you’re looking for some companies to try this system out with, check here.
** Disclaimer: The Tempered Bull is committed to enhancing the finance wellbeing of our readers; however, these articles should not be your only resource. The suggestions made here are meant to be taken in conjunction with professional financial assistance. We are not financial professionals, just regular people with a passion for sharing our experience. The Tempered Bull does not have any private knowledge about the companies we discuss, and The Tempered Bull and its associates do not benefit from your purchase or sale of any equites. The Tempered Bull has a disclosure policy.