I’ve written on plenty of occasions how individual stock-picking, in general, is extremely difficult to do. Even professional active managers routinely underperform their benchmarks.
I’ve also always been quick to acknowledge it might sound a bit hypocritical that I pick individual stocks. I don’t do this in an effort to retire early and buy a yacht. I do this as a pressure release valve for having some fun. I also enjoy investing in good businesses that resonate with me and give me some skin in the game.
Truthfully, I haven’t made many moves over the last year or so in my brokerage account or Roth IRA where I hold some individual stocks*. After my (albeit quite lucky) purchases made near the bottom in 2020, I’ve been somewhat of a spectator just riding those higher and watching in near amazement.
Until Tuesday.
I bought Zillow, only to have it fall 23% the next day. I bought towards the close on Tuesday when it was already down more than 10% on the day and down nearly 50% from its highs.
US home prices have skyrocketed by 20% over the last year. Remember, that’s just an average – in some major markets they’re up way more. Housing is on absolute fire. And this isn’t even anecdotal anymore where it’s concentrated in certain areas. It’s happening everywhere.
And somehow, the nation’s largest digital real estate conglomerate is managing to fail miserably in the midst of this runaway real estate bonanza. It’s mind boggling how much of a disaster Zillow has been as of late. The stock is in the midst of a 65% drawdown, having seen two thirds of the value of the company wiped out in six months.
The day I bought Zillow, it was well-known their home-buying (dubbed iBuyer) program was not working out. How badly? Well, Zillow announced they would stop flipping homes for good as it stands to lose more than $550 million, and will lay off a quarter of their staff.
I’ve been a long-time user of the platform and a fan of Rich Barton, Zillow’s CEO. He took a shot on iBuying and it didn’t work out. It’s okay. The CEO is supposed to try things. It turns out that the realtors who were mocking automated home buying and selling were right. This is a tough business and it often requires an insider’s knowledge of the local market.
When I bought, the stock was crashing, but I wasn’t trying to be a hero and catch the bottom. I wanted to buy a little chunk though to follow the name more closely and buy more if and when it stabilized**.
So what did I learn? Well...What I already knew.
I already knew “buy low, sell high” is one of the most garbage pieces of financial “wisdom.” Most of the time when you buy low, you end up selling lower. You’re far better off buying them on the way up than on the way down. This is especially true in the current market environment.
If you are going to buy a stock on the way down, you must have a long time horizon and have a very strong ability to stick with it. Don’t expect that a stock will turn around just because you bought it. The stock doesn’t know you own it.
A way to minimize your downside is to own a small enough position such that if you’re really wrong, like I was, then it won’t hurt too bad. And that’s what I did. I own more than a dozen stocks. Zillow was my smallest position, even prior to the huge drop. So although it hurts to lose 30% in a matter of days, I won’t lose any sleep over this.
So how do I learn from this mistake moving forward?
Psychologist Daniel Kahneman said something really smart on a podcast with Barry Ritholtz:
Whenever we are surprised by something, even if we admit that we made a mistake, we say, ‘Oh I’ll never make that mistake again.’ But, in fact, what you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising.
We tend to get far too specific when we learn lessons.
I could say “I’ll never buy a growth stock heading into earnings on the way down ever again”. That’s far too specific though. People want to learn their lesson so they don’t fall for the same mistakes next time.
But that’s a hard way to learn a lesson. Learning specific lessons are only relevant if the next event is caused by the same thing as the last one. But it almost never is. The next recession is rarely like the last recession. The next bubble is rarely caused by the same forces as the last one. So the specific lessons we learn from each crisis may not help us avoid or navigate the next one.
These humbling investment blunders are a feature, not a bug for me. They’re constant reminders that investing in individual stocks is really difficult. They prevent me from ever getting too far over my skis.
*Of course I’ve still been contributing biweekly to several other accounts which are much more on autopilot.
**Stabilization is pretty laughable at this point though