Lesson Learned: Look for the One-Two Punch

Buy when there’s blood in the streets, even if the blood is your own

Baron Rothschild

Just like in boxing, it’s the punch you don’t see coming that floors you, and combos can wreak major havoc on a stock price or a market. Warren Buffett commented on the recent 1-2 punch of COVID-19 and oil price shock that lead to one of the fastest falls in US market history. I’ve seen this in my own investments, I invested in IRI, a company that got hit with a major 1-2 that dropped it’s share price by about 60%. I took advantage of the first drop, but even though I knew the company’s balance sheet was solid, and that the second punch was really not related to company performance I failed to take advantage of it. In the end I sold out, at a measly 8% profit after 2 years. If I’d had a bit more faith I could have increased my profit to about 20% with relative ease; major price drops can provide huge buying opportunities for amazing companies. Though it’s easier said than done, all your doubts will rise to the surface as you’re looking down the barrel of a 50% loss. 

Ways to manage this:

• Be willing to add to your holdings on major price drops, the one caveat to this is that there’s no long term impact on a company’s business prospects. This isn’t the easiest question to answer, and will teach you rapidly how well you understand your investment.
• If you fail to do it, try and remember how it feels when you see the prices go down. Next time you have that feeling, try to channel it into action instead of freezing!