Refining Fire

This market downturn has taught me some things.

First, don't do bargain buys in any part of the bull cycle. I had to cut a few of these positions because the downturn was like a refining fire - only the good ones recover - the bad ones keep going down. Bargain buying in a bull cycle is tempting because everything else looks expensive, and there's thing hunt for yield / returns. But it's only a matter of time before the fire burns away the dross, leaving only the pure elements. It's more important to buy strong companies (even if they're expensive) rather than bargain buy weak companies (hoping they will yield a higher % return).

Second, percentage returns for the rallies are misleading - e.g. "oil is up 50% from its lows". It's not uncommon to see severely beaten down stuff rally in double digits, leading you to think you should have bought beaten down stuff. But we often forget we can hardly ever pick the bottom, and so these returns are only relevant to the minority who did catch the bottom. For the rest of us, we are likely to have endured some double digit drawdown, before seeing some double digit rally (from the bottom), leaving our position pretty much near breakevent.

Third, think carefully and clearly on the next steps. This is a WIP as I consider whether I should bet big on a down move, or start putting money back into equities. We have to give ourselves the leeway to be wrong about things. Some decisions are psychologically more difficult than others (e.g. make a bear call while it's rallying, and missing a once-in-a-decade opportunity to buy), but I have to weigh things out as I best can, and make the mental decision and not waver. Rigour is not always rewarded - accept that. Be content that you've made your best decision, regardless of outcome.