What a week. I can’t look away from the GameStop and other trades that have been going on. Beyond the financial implications, the story itself is full of all the drama. Greed, fear, rage, deception, power, and downright balls. It’s got everything. Who needs Real Housewives when you’ve got markets like this.
As I’ve watched this week unfold, I’m reminded of many lessons from our favorite value investors like Buffett, Pabrai, and Graham. The following is what’s been on my mind as I’ve been watching this saga unfold.
1. This is why we train.
Weeks like this are why I put in the work. It’s easy to be a disciplined value investor when the market goes up or down by a percent or two each week and everyone’s kind of rowing the boat together and getting 10 to 15 percent a year returns. But it’s hard to be a disciplined investor when you’re getting your 10 percent a year and your neighbor is getting yolo multi-baggers on a daily basis. Envy, greed, and self-delusion are all at risk of kicking in.
But I’m a trained athlete in this investing game. I know how to handle these human emotions and workaround them because I put in the work every day to prepare myself for volatile times like this.
Berkshire annual meetings while I shower.
Pabrai lectures at lunch.
Buffett letters in the afternoon.
Howard Marks on the audiobook before bed.
Charlie Munger in my dreams.
I am constantly trying to become a better, smarter, more disciplined investor, and weeks like this are when the work pays off.
2. Thou Shall Never Short
Thank you Mohnish Pabrai for the 10 commandments of investment management. I hang them on my wall, and every time I walk in and out of my office I make sure to look at the commandments and read one of them in order to keep them constantly top of mind.
One of the commandments is thou shall never short. So I never short.
Buffett and Munger also said don’t short. So I never short.
Shorting has a limited upside and an unlimited downside that can wipe you out, and lots of investors are dealing with that threat this week. I’m glad I’m not one of them.
3. Speculation vs Investment
In the Intelligent Investor, Ben Graham taught us the difference between speculation and investment. I’m an investor, not a speculator, but I have to admit, my god speculating look like fun.
If memory serves, Graham advised that if you’re inclined to speculate, take a small portion of your money and allocate it to speculation and keep it separate from your investment money. This makes sense and if inclined, it allows you to partake in speculation without risking more than the small amount you set aside for that activity.
There’s no denying that weeks like this make speculation look fun and attractive, but if you’re going to do it, I like Graham’s method of keeping it totally separate from investing and keeping it small.
4. “Anything can happen in markets.” – Warren Buffett
I’ve heard Buffett say this during his annual meetings and he really emphasizes the word anything. And weeks like this show us that he’s correct. Anything can indeed happen in markets.
Don’t get complacent, don’t get tricked into this time is different thinking, and don’t take on more risk than you’re comfortable taking on. Anything can happen in markets, and we have to keep that in mind as we go about our investing business.
5. “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” – Warren Buffett
Buffett has often said something to the effect of “buy companies you’d be willing to hold for a decade if the stock market was closed.” This quote is now very relevant all of a sudden as some brokerages are putting restrictions on what investors can buy. That’s not far off from putting restrictions on what investors can sell. If you buy a stock, you’re buying a business whether you like it or not, and there might be times where you’re not be able to sell that business back to Mr. Market as quickly as you’d like. This is something to consider when thinking about purchasing a stock.
6. Speaking of Mr. Market…
I’m not a speculator, but from time to time my business partner Mr. Market is. And right now he seems to be in a feverish, speculating mood, and I’m prepared for him to ring my door. While I’ve held Ring Energy, there have been days where the price has moved up very quickly, and in the event that the speculative fever moves over to oil companies, I’m prepared to make a deal with Mr. Market if we find an agreeable price.
Ring was up over 13% on Thursday, and after hours it’s up another 12%. And it looks like that at some point during after hours trading, Ring might have gotten up to $1.39, having started Thursday at $1.02. Odds are that it won’t happen during this speculative period, but if the energy does focus on oil companies, and Ring Energy does shoot up two or three times very quickly, I’ve already checked my numbers and have a target sell price in mind for a lot or all of my shares. It’s not likely, but if that rare scenario plays out and for some reason Mr. Market wants to buy Ring Energy at a lot higher than it is selling for today, I’m prepared to jump on a good offer and get the deal done.
These are interesting times. I’m viewing the speculative activity with humility, discipline, and detachment, but I’m also ready to be opportunistic if this speculative fever boosts up Ring or any of my other holdings.
And beyond anything, I just find it thoroughly interesting and entertaining. I can’t look away. As someone who wasn’t an investor in 2000 and wasn’t really in the game in 2008, it’s rewarding to get some real-time exposure to a volatile investing environment and to try to be a better investor by the time we hit the other side of it. Good luck out there.