I understand there may well be a number of readers out there who have suffered huge losses recently in particular stocks.
For example, in the last month or so there's Bellamy's Australia Ltd (ASX: BAL) and Sirtex Medical Limited (ASX: SRX) which have already been extensively written about on this site.
Aconex Ltd (ASX: ACX) and TPG Telecom Ltd (ASX: TPM) have also both experienced dramatic, wealth-destroying and I'm-outta-here-and-will-never-invest-again share price falls of 68% and 52% respectively since July's peak.
If you own, or did own, any of these, how did you react?
Did these four stocks comprise 100% of your holdings, or have you sensibly constructed a portfolio of 20-30 stocks over time hence mitigating the pain of any one of these?
I should have sold Bellamy's at $12.
I could have avoided buying TPG last December as I knew they were expensive.
I would have sold Aconex if I had known how severe the market was going to be.
Everything's easy with 20/20 hindsight though.
The first thing I'll suggest to you is to avoid thinking 'I should have, I could have, I would have'.
This is not only a pointless exercise given events have already happened, but it's also counter-productive to future investing success and harms confidence. Banish these thoughts forever and let's focus on some context instead.
Commonwealth Bank of Australia (ASX: CBA)
Think about CBA shareholders when the share price reached $61.22 on 14 December 2007 only then to witness the stock's amazing fall to below $25 in January 2009 (a drop of 59%).
Yes, some of you out there may say they sold at the peak, but given the amount of extreme fear that abounded during the GFC, how many of you perfected this 'twin-trade' by then then picking up the shares again at $24.90? Few I'm assuming (although if this is you, congratulations!)
During periods of extreme volatility, I think long-term investing gets a bad wrap, but CBA shareholders who did hold on to their shares from December 2007 to today have enjoyed a compound annual growth rate (CAGR) of 11.1% turning $10,000 into $28,574 over 10 years.
I can't say that's a bad return.
CSL Limited (ASX: CSL)
A market darling now for more than two decades, shareholders back in November 2001 may have regretted picking up their shares at $10.34 only to see them bomb to $2.57 (both prices split-adjusted) by late May 2003, a precipitous fall of 75%.
Yes, shareholders could have sold to avoid such massive wealth destruction, but simply by doing nothing, an investor buying CSL around November 2001 has earnt themselves a CAGR of approximately 17%, inclusive of the 75% stock price fall at the beginning.
A shareholder who invested $10,000 but didn't sell (either due to ignorance, fear, stubbornness, or maybe even holding a rational view on the company's long-term prospects) today has a position worth approximately $105,000.
There's hope [if you're properly diversified]
In my view, if you can build a reasonably-sized portfolio at reasonable prices, then I'd argue that you can afford to let some stocks run, enjoy the beautiful winners and endure the big losers when they occur.
In theory, some brilliant insightful analysis might save you and allow you to sell those positions before the big falls arrive, but as I've demonstrated above, tenaciously holding on can sometimes be the better strategy if you can stomach the gut-wrenching volatility.
For the average retail investor then, the extreme pain of huge losses like Aconex can only be mitigated through diversification.
My first recommendation for you is to build towards a reasonably well-diversified portfolio of 20-30 stocks so that no one hit will wipe you out (both financially and emotionally).
I know not everyone will agree with this, but my second recommendation is to hold your positions regardless because regulators, competitors, suppliers, customers, business models, management, products, shareholders, and financiers all change over time so the disaster that is Aconex or Bellamy's today may still recover (and importantly, this may not be predicted by the market).
Capitalism is a powerful force and you should never underestimate the strength of humans to want to improve a bad situation.
I can't recommend highly enough an article titled The Agony of High Returns by Morgan Housel who argues some of the greatest sharemarket performers over a period of two decades were also the same stocks that were volatile enough to make you vomit. As Morgan wrote:
Capitalism is fierce about denying you something for nothing, and higher returns tend to demand the mental agony of higher volatility.
Foolish takeaway
I can't promise how any of the stocks in this article will continue to perform, but you shouldn't beat yourself up if you're now down substantially on any shares you've bought recently.
Instead, learn from your recent experiences. Understand that not every stock recovers, but many do.
Build your portfolio, increase your understanding of markets, and mitigate the risk of despondency by condemning to exile the thoughts of ''I should have, I could have, I would have'.
These have no place in investing.
