7/5/2022: Catching the Falling Knives

Getting badly injured

Like most investors, I want to be smart money. Well, the bear market has humbled me and grounded me. If success is a lousy teacher, failure teaches great lessons. Here is the story of me buying the dip and the dip dipping more deeply. 

I have always been a fairly conservative investor. My liquid portfolio is 60/40 index funds, Facebook stock and cash. In 2021, I decided to aggressively diversify from FB holdings. After selling, I wanted to put the proceeds for growth opportunities (because that was what people did in 2021). At first, I bought some biotech stocks. I am very bullish on biotech stocks in the long run. I thought I bought them at relatively low prices: SDGR 0.00%↑ at $70 (ATH $110) and PACB 0.00%↑ at $20 (ATH $35). They have been down 60% and 75% respectively since I bought them in 2021. I closed the positions of PACB at 50% loss but kept SDGR. I forgot that stocks of solid companies could go down 80% if the valuation wasn’t right. 

In December 2021, I bought COUR 0.00%↑ at $35 and thought they are positioned to dominate the higher education market in the long run. But after I bought the stock,  it dawned on me that I didn't need to get involved in every good opportunity out there.  I am a busy person. Buying and researching small cap stocks was not a good use of my time. I sold COUR at cost. It turns out I dodged a major bullet. COUR is now hovering around $15. I still believe in the company in the long run but again, I don’t think I should get involved in small caps. 

Interestingly, I made the same mistake again in March 2022 buying PINS 0.00%↑ . I thought PINS was very undervalued, falling from $80 to $20 with Enterprise Value/Revenue around 4.  Because of the Apple privacy change, I believe some of the Facebook ad budget would be shifted to smaller players like PINS. I bought the stock at $22. I realized my mistake almost immediately after the purchase. (I promised myself not to buy individual small cap stocks when I sold COUR.)   Luckily, I was able to sell PINS at around $25. In the meantime, I realized that I have a behavioral problem.  I needed to resist the urge to buy the dip. I hypothesized that perhaps I had too much cash in my brokerage account. My rational brain told me to keep the cash but my impulsive brain wanted to buy the dip.  I moved the cash to a different account and  thank god I have since not done any dip buying. 

Finally, my biggest mistake is selling puts on ZM 0.00%↑ and DOCU 0.00%↑ when they crashed. I have always been a fan of the Zoom and Docusign products. When ZM was around $140, I thought the price had become reasonable. I sold puts at $120 strike and thought if the price dipped below, I would own the stock. ZM of course crashed further but luckily I closed the option position when the stock rebounded at a slight loss. Same thing happened for DOCU. I sold the puts at $100 strike while it’s around $115. This time I was not so lucky. It went all the way down to $60 and I closed the option position at a steep loss. It turned out I didn’t have a super high conviction for ZM and DOCU. Their SaaS businesses are probably going to be hurt during the recession as businesses are cutting back their spending and avoiding contract upgrades. High growth companies also over bloated during the good times. I still think they are going to be great companies in the long run but they have a few difficult years ahead. 

I believe what happened to me is what happened to most retail investors in the current bear market: I am not mentally strong enough to hold onto individual stocks with calm when they go down more than 50%. The overall lesson is that I should have stuck to index funds/cash and chilled. I plan to sit tight on the cash pile  and buy some index funds when SPY dips below 320. If SPY does not dip below 320, I will hold onto the cash as my liquid portfolio is already 50% equity. This market crash is too scary. Cash is king.