In their recent episode of the VALUE: After Hours Podcast, Cassel, Taylor, and Carlisle discussed During Drawdowns – Add A New Position Or Buy More Of What You Have?. Here’s an excerpt from the episode:
Ian: Maybe a good place to start and I’ll pose this question to Jake first. During a drawdown, when you look at your portfolio in the fund or the assets you manage, when you’re staring at your own stocks going down, are you more prone to add a new position to the portfolio or buy more of what you already know and trust?
Jake: Mm. That’s a good question.
Tobias: It’s a good question.
Jake: Ideally, I would have calculated where my return on time and it goes, and what it is better to be spent on figuring out more in depth on the existing portfolio or searching for new positions to upgrade. I don’t know the answer to that yet, but I’m working on it. I’m gathering data on it at all times.
Tobias: Discussing your Journalytic at all. Is that public?
Jake: Yeah, that’s where it’s going to be recorded eventually. Well, okay. In a total drawdown, where everything is puking, I’ve only been in one of those scenarios. Before it’d been more idiosyncratic things puking, in which case, I liked doubling down. That’s pretty common for me. I actually try to buy small positions and work my way down to a lower cost basis as I go and keep capital available for that position to dollar cost average into.
So, I prefer buying more of what I know, actually, but that doesn’t mean I’m not pretty happy to occasionally scoop up something new or upgrade in the portfolio, as well, like punch something else out and feel I’m getting more quality for the same price. But yeah, I don’t know. Toby, how about you for the screen?
Tobias: Yeah. I have rebalancing dates now. I don’t react to what is happening in the market, because I used to not react very well. I think honestly, I can’t remember what I used to do, whether I used to add or double down probably a little bit of everything. Yeah, so, I’ve taken it part out of my hands now, because I’m not very good at it. I get too excited.
I get into that hot state when the market’s going down. So, I’m in a little bit of a heightened state at the moment, because I’m hoping we get a bit of a flush here, but we’re not quite there yet. Is there a good approach, Ian? Do you have a fair suggestion?
Jake: Yeah. Ian, what’s the right answer? [laughs]
Ian: I’m not saying there isn’t. I was just curious how you guys’ approach that, because it’s something I’ve been journaling quite a bit on through Journalytic, hats off to Jake, and you’re just thinking more about that. I find the more vicious the drawdown, it actually becomes harder to add a new position, because I think during drawdowns, you get shorter term, because the market just beats you up.
You get more short term and you get– You don’t want to lose more money. You start thinking more about every one of your positions, when their next earnings announcement is going to be. You start micromanaging your portfolio, because you really don’t want to take another leg down. It’s just like, you can’t handle it almost mentally.
And it affects me as well, I’ve been doing this for 20 years. One of the things I just tried to do is, try not to get more short-term during drawdowns, because that’s when you make bigger mistakes. I’m just trying to whether it’s a two-year time horizon, which I feel the smaller the company, the more impressionable that smaller company is the shorter time horizon you can look out.
But let’s just say, two years, or three years, or four years, you’re just trying to stick to that two-year timeframe and just keep on telling yourself, “Okay, this business is going to be bigger, earn more money, and not diluting.” If the answer is yes, there’s really not much else to do except buy more as that stock comes back in. If you have those opportunities, you believe in.
A lot of times it makes sense just to likely add more to the things you already own versus adding a new position, which you don’t know or trust yet. Because I do think that, especially as concentrates stock pickers, which is what I am, which I’m sure a lot of people are that are listening to this, I do view the– If you’re concentrated sub-20 positions, especially sub-10, I do view like, it’s almost like a relationship with these companies.
A lot of these relationships with the stocks, you don’t know how they really are until you’ve owned them for a period of time. You’ve got to see them react to different circumstances, whether that’s a macro circumstance or a micro circumstance. So, that was just one of the things I journaled that I had out there.
Ian: I think also, when stocks are dropping, you get more and more macro centered. I think, prior everybody on the Zoom probably has never thought more about interest rates, inflation, or whatever you want to call it more than in the last 60 days, and I think, the more you become more macro and less micro focus, the more you turn yourself into or trying to be a more of a market strategist, rather than a stock picker, that’s the wrong place to be, and it makes you unproductive, and it paralyzes you to making any decision for the portfolio. So, I think for me, a lot of times, I just need to stay micro focused.
The way I stay micro focused is really trying to stay in control of what I can control, which is the companies I invest in. If you want to add a macro component to that, fine. Then just decide that you believe that interest rates are going to continue to go up, and that a recession is going to start imminently, and make your investment decisions based on that, and make sure the quality level of those businesses you’re investing in can stack up well in that type of environment. So, that’s how I disconnect or at least try to disconnect in a productive way during the market environment, like, a lot of people are going through right now.
Jake: [crosstalk] I think it’s very insightful there with the short-termism that creeps in, because I think as you’re taking this quotational pain, you start to not want to see that next print. The next quarter, you’re like, “Oh, God, I almost don’t even want to see it.” There’s so much uncertainty about like, “Is this going to be a landmine that just completely explodes it.”
When you know that that’s lurking, that uncertainty is incredibly agitating and you’d almost rather– We’ll get into this when we get to the dopamine stuff, but there’s a difference between risk and uncertainty when it comes to dopamine. We find actual risk-taking often like you get a dopamine hit from it, but uncertainty actually turns that off and we find it agitating.[giggles] I think that you said something very smart there that short-termism now is, like, you’re looking into that next quarter. I don’t know if you felt this way when things were going up, but you look forward to that next quarter, because you’re like, “Ah, I think this company has been killing it. I can’t wait to see the numbers.” Now, it goes, it flips completely in reverse and now, you’re scared like, “Oh, [crosstalk].”
Tobias: [crosstalk] to see the print.
Jake: Yeah, I hope they don’t poop the bed in this quarter, because I can’t take another 50% drawdown.
Ian: That’s the human nature of it. You overanalyze when things are dropping and you under analyze when things are going up. Instead of becoming a macro strategist during drawdowns, you should just be nibbling the things you like as they go lower, instead of just trying to pick a bottom, which can cost you more money.
Tobias: You don’t want to spend time on social media through times like this. One of the things I don’t check my portfolio prices during the trading day. That’s one of my rules. I wait until everything closes, because it feels more static and slower. Things aren’t moving all over the place. I find it easier to think when nothing’s trading. But I can get like a contact high just by going onto social media and seeing everybody panicky one way or the other. I’ve certainly got it today, just from being on I can see everybody going absolutely bananas in my stream and yesterday, too everybody was going nuts. You don’t need to know what the actual print is to know roughly what’s happening– [crosstalk]
Jake: You can just [crosstalk] the room. [laughs]
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