Sometimes you encounter the champagne problem of stock trading, having the companies you love start to rocket just as you start buying them.
Here’s a question I got from a subscriber who, after reading my latest book called Everything You Need to Know About Investing, wanted some specific affirmation of the principles in the book playing out in real-life:
Q. 3D Systems DDD and Stratasys SYSS going gangbusters. I want to add and I know you suggested adding more in the low 30′s but that ain’t happening now. How do you choose when to add more when all these stocks do right now is go up up up?
A. Say you own 1000 shares of DDD and you want to own 2000 shares. Buy 300 shares right now and just know you probably topticked the near-term. Then buy another 300 shares in the next day or two any time it looks weak. And then buy the next 400 sometime in the next two weeks on weakness. Knowing the whole time that you might pay up instead of averaging down since this thing is indeed on a tear.
The stocks that subscriber is referring to, 3D Systems and Stratasys, are two 3D printing stocks which I wrote about for the Revolution Portfolio back on July 10th. Since then both are up big, trouncing the S&P 500. So the questioner is really asking “Have these names run too far too fast?”
I’ve seen retail investors and professional money managers sell way, way too early, way, way too often. Learning basic portfolio management and discipline will pay enormous dividends over time and most investors completely ignore that skill set. When I was running dozens of millions of dollars I encountered this exact problem constantly. I can’t count how many times I wanted to size a new position after doing months of research, calling suppliers, combing entirely new industries, only to have the stock start taking off before I got a chance to really make it a big bet for my investors.
That’s one of the best lessons you learn from managing money: when you’re investing for the long-term and trying to hit consistent doubles, it doesn’t matter that much if you miss the first 10% of a move. When you’re convinced about a trade, when you can’t sleep without thinking about the stock its prospects for the next 10 years, you’ve gotta start buying.
When I was first building an Apple position back in 2003, little rumors about whom they were going to buy (candidates included Universal Music and a movie studio) would whip the stock around 15%, 20%. It seems silly now that anyone ever worried about Apple going from being a $7 stock to a $5 stock, but without perspective and experience, you could have known how revolutionary the iPod was and still gotten shaken out of that trade.
Heck, after Apple’s latest earnings call plenty of smart people who know an iPhone 5 is coming out in a month, and that Apple will absolutely sell a couple hundred million iPhones and is getting closer to $200 billion in cash, sold the stock $40 cheaper than where it is right now! And when stocks go against you, when it’s the absolute best time to start buying the business on the cheap, investors have a devil of a time pulling the trigger. Humans are social and we like being part of a group, but there’s no reason to be part of the herd in that case.
I want the person that asked about DDD and SSYS to flip their logic and ask themselves a couple questions. What would you do if before the next earnings report, on no news, DDD starting getting crushed, falling to the low 30s we talked about, and even into the 20s? You say that you’d like to have added lower but would you be scared off and start changing your reasoning about the stock? What if Goldman Sachs GS puts out a note saying that 3D printing is not going to be very big and all the fair-weather owners of those stocks sell Autodesk ADSK and everything even tangentially 3D related, are you going to be a buyer on a day like that?
I’ve heard from plenty of readers who were adding heavily to their Fusion-IO FIO position in the last month, with the stock 40% lower than it is today, when I was banging on about how it was one of my biggest positions. But I also know that some of my subscribers and readers sold their FIO at the exact wrong time instead of buying the business on the cheap.
Point being once you’ve identified a massive, long-term trend, like 3D printing, and you’re convinced about the management and the company’s ability to grow earnings over the next decade, start buying. If the stock goes lower, have the discipline to buy some more. Mentally keep cash in your account that is reserved just for that purpose if you think the stock is temporarily overheated.
And don’t sell when the story hasn’t changed, only the price has. Averaging up isn’t necessarily a bad thing, get away from the notion that you have to time everything perfectly. Think of yourself as a VC investor looking to making 10x their money on trends like 3D printing.
You can read lessons like this and others in my new book Everything You Need to Know About Trading, available now in paperback and as an ebook.
Cody Willard writes Revolution Investing for MarketWatch and posts the trades from his personal account at TradingWithCody.com. At time of publication, Cody was net long Apple, 3-D Systems, and FIO. Follow Cody on twitter at twitter.com/codywillard. Cody’s new book, Everything You Need to Know About Investing, is available in digital and in paperback.