How Well Can You Stomach Success?

[Gumby]

I've lost my appetite for speculation. Truthfully, I never had the stomach for it.

I started investing during the dotcom boom and made a lot of unrealized gains which eventually became realized losses.

Having lost my desire to take big risks with my money, in early June of 2003 I decided to take a very small risk on a small "fruit" company, at $9 a share, that most people had doubts about. A little over a year later I had doubled my small investment, yet I did not celebrate due to the tiny initial investment I had made.

2005 proved to be a very big year for the company, and by the end of that year the company had climbed to roughly $75. My predictions had been vindicated, but I could not bring myself to sell as I was sure the future was still bright for the company. It was clear to me that the best was yet to come. I kept telling myself that I put so little into my initial investment that I shouldn't worry about losing money at this point. I would keep a very close eye on the company, and if a hint of bad news about the fundamentals of the company crept into the picture, I would sell it.

By the end of 2007, my little "fruit" company had reached $200 a share. Yep. I didn't sell it. I still believed in the company's future potential. Besides, I had put so little into the company that even if I lost half of my unrealized profit, I'd still be happy with any decent return. Was I crazy??

As luck would have it, my stock dropped to $85 in 2008. The future of the company still looked great, but the company's CEO had personal issues and the overall market weighed heavily on the stock price. I held on and certainly regretted not selling at the high.

What was I thinking??

Still, I stuck to my guns because I felt that the market was overreacting. I firmly believed that the fundamentals of the company couldn't have been better.

2009 proved to be a great year. The stock steadily rose to $212 by the end of 2009. I had told myself that I would sell if the stock ever climbed back to this level.

But, the company seemed to be poised to keep growing. That old excuse of having put so little into the company crept back into my head. I had nothing to lose, right?

2010 came along, and the stock kept climbing. My little "fruit" company had easily outgrown its largest competitor and was on its way to becoming one of the largest companies on the face of the planet! Meanwhile, the outlook for the world economy continued to darken. What to do?

I sold at $250.

After a 2,500% profit, I moved all of my money into a brand new Permanent Portfolio. Yes, I did very well with my stock pick, and I feel lucky that it more than offset my other losses. But, my initial investment was so small that it barely changed my net worth over those seven years. It was then that I finally realized that I didn't have the stomach for speculation anymore. It was too wild of a ride to hang on to. Even after all that profit, I regret not having invested more in the company, and I realize that I will likely never be able to pick a stock like that again.

It also occurred to me that I would have never realized a 2,500% profit if I had initially invested a substantial amount of money in that company — I probably would have sold most of my stock years ago to lock in a solid profit. Had I employed any kind of market timing strategies, I likely would have sold at the wrong time, or minimized my return due to its high level of volatility. In reality, there was almost no way to invest in the company without uneasiness, stomach-churning, or some level of regret.

The company, if you haven't figured it out by now, is Apple Inc. and its stock is now hovering at $348 as I write this. The company looks like it may never stop growing.

Even though, entirely due to luck, I managed to pick the stock of the decade — and actually held onto it for most of the decade — my emotions still prevented me from even coming close to realizing the gain that I could have.

I've read many accounts from those who have wisely realized that the stability of the Permanent Portfolio allows them to stay the course when bad times come along. But, the truth is that there is plenty of hand-wringing on the upside of any high-flying investment. It's not nearly as easy as you think it will be.

It's not often that people get a chance to experience such high-flying success, but I can tell you from experience that it was hard to hold on for the ride. The Permanent Portfolio has made investing a lot easier to manage. Success is not nearly as easy as it sounds.

[MediumTex]

Wow,what a great post.

It's so true that the same human mind that makes the good pick to start with has to be able to sit by and watch those wild fluctuations along the way.

It's not easy, even when it's going your way.

I bought some Apple for my VP last year at $240 and sold at $260.  I felt like a genius.

One of the things I like best about the PP is that its cash component provides a mechanism for taking profits off the table in an orderly manner.

[Coffee]

Can you explain that last sentence, Tex?  I'm not understanding why you're singling out the cash component?
Thanks.

[MediumTex]

The cash piece is where the gains in gold, stocks and LT bonds get taken off the table.

I just feel better knowing that there is a mechanism for taking speculative gains in the volatile PP assets  and placing them in a safe place (i.e. cash).

[gizmo_rat]

Good story Gumby

My 'got lucky' story is similar in timescale and gains, except that the initial investment was a very significant chunk of my net worth.

After 4 scary nightmare years of trying to build back a cash cushion I was able to sell 33% of my investment. Good times.

Not wanting to have repeat of my 4 scary years I sought professional advice and paid fees to invest in a managed 'diversified portfolio'. It was 2007, I think you can guess how 2008 went (-37%).

Fast forward through the subsequent 3 years of financial nausea, anger and guilt, I was suddenly able to sell out my remaining initial investment. Bright times return.

After this, HB's advice speaks to me in a way that no other even comes close.

That said I'm now so risk adverse I'm struggling to commit myself to the most rational, proven approach I can find and critically understand.   

There's no free rides, slow and steady really is the best.

[Gumby]

That said I'm now so risk adverse I'm struggling to commit myself to the most rational, proven approach I can find and critically understand.

I was very nervous about investing in the PP at first. I started with 1/3rd of my net worth, and then phased out my VP over the next two months. Best move I've ever made. It didn't take long to see that the PP is so much easier to handle emotionally due to the low volatility and gradual return.  Had I simply invested all (or even half) of my net worth in the PP in 2003, I would have been way ahead of my tiny 2,500% investment, and happier all along the way.

Volatility cuts both ways — it plays with your emotions during times of loss and during times of great success. To some people volatility is a drug. For me, feeling uneasy and uncertain even during times of great success made me realized that I needed volatility rehab.

As MediumTex pointed out, having a mechanism to rake in profits and keep volatility in check is what makes the PP so much easier to handle. If you can find a systematic way to take profits and simultaneously reduce overall volatility, the uneasiness goes away. That's exactly what the PP did for me — it was a cure for volatility sickness.

It all made me realize that the human brain has nearly as much difficulty coping with success as it does with failure.

[MediumTex]

It all made me realize that the human brain has nearly as much difficulty coping with success as it does with failure.

Look at all of those lottery winners whose lives seem to be destroyed by the sudden riches.

[Lone Wolf]

Look at all of those lottery winners whose lives seem to be destroyed by the sudden riches.

I find myself marveling that if only these lotto winners would have simply slammed their money into a Permanent Portfolio they could have lived the rest of their lives in complete freedom.  What a wasted opportunity!

Oh, and great post BTW Gumby.  Even with such a great pick, emotions take most of us for one hell of a ride.  And then you consider that most picks aren't going to be anywhere near that good.  It makes the Permanent Portfolio (or at least some Bogle-esque approach) much, much more appealing.

[Coffee]

The cash piece is where the gains in gold, stocks and LT bonds get taken off the table.

I just feel better knowing that there is a mechanism for taking speculative gains in the volatile PP assets  and placing them in a safe place (i.e. cash).

Still unclear.  My understanding is that you sell down the big gainer(s) once a year and immediately reinvest into the under-performers?  Where are we getting this "placing gains in cash" part from?  I'm confused.

Thanks. -- Adam.

[MediumTex]

The cash piece is where the gains in gold, stocks and LT bonds get taken off the table.

I just feel better knowing that there is a mechanism for taking speculative gains in the volatile PP assets  and placing them in a safe place (i.e. cash).

Still unclear.  My understanding is that you sell down the big gainer(s) once a year and immediately reinvest into the under-performers?  Where are we getting this "placing gains in cash" part from?  I'm confused.

Thanks. -- Adam.

When you rebalance a portion of your winners will go into cash.  That makes me feel better because once it gets into the cash pot you're not going to lose it no matter what happens after that.

You're right that a portion of the winners will also go into the losers, but I was just speaking about a function of the cash component.

[Gumby]

My understanding is that you sell down the big gainer(s) once a year and immediately reinvest into the under-performers?  Where are we getting this "placing gains in cash" part from?  I'm confused.

You can either rebalance annually, or just wait until when any asset grows to 35% of the total portfolio, or shrinks to 15% of the total portfolio.

Say you start with $5,000 invested as:

$1,250 in Cash
$1,250 in Gold
$1,250 in Stocks
$1,250 in Bonds

Time goes by and let's say Gold rises a lot, bonds fall, stocks rise slightly, and cash increases slightly. So, you might have...

$1,293 in Cash
$2,038 in Gold
$1,321 in Stocks
$1,010 in Bonds

Gold is now making up a little bit more than 35% of your portfolio. So, it's time to rebalance. When you hit a rebalancing band, you're supposed to rebalance everything back to 4x25%. In order to get back to 4x25%, you would have to...

Sell $622.50 of Gold, and use those dollars to...
Buy $405.50 of Bonds
Buy $94.50 of Stocks
Save $122.50 as Cash

After rebalancing, you end up with 4x25% invested in...

$1,415 in Cash
$1,415 in Gold
$1,415 in Stocks
$1,415 in Bonds

Your new grand total is $5,662. That's the mechanism for taking profits as cash and reinvesting into losers.