Investing is difficult. It can make smart people look dumb. And it can make lucky people look smart.
You can be right about an investment but look sorely wrong for a long time. At other times, investors’ attitudes about a particular investment can turn on a dime. Hot stocks can turn cold without warning.
Take Tesla, for instance. Tesla manufactures electric vehicles. Because of the cost and complexity of starting a new vehicle manufacturing company, many analysts and industry insiders expected Tesla to flop after the company started in 2003. Some still do.
Indeed, this past summer, warning signs of Tesla’s decline – if not demise – began to flash. Tesla had acquired another company that had stretched its finances. The company was struggling to hit demand targets for its vehicles. Elon Musk, Tesla’s CEO and largest shareholder, was said to be acting erratically, and some speculated his actions indicated the company was under intense stress.
Others thought Tesla was cooking the books – at the very least, pushing the boundaries of acceptable accounting principles. Analysts were questioning Tesla’s financial statements.
There were also fears that Tesla’s self-driving technology was released prematurely, before enough testing was performed. Several Tesla owners were killed in accidents while their vehicles were in self-driving mode. The prospect of lawsuits weighted on the company and its investors.
In short, it didn’t look good for Tesla.
By June 2019, Tesla’s stock price hit a low of $185 per share, down from $330 just five months earlier. Investors were fleeing, willing to take a loss before they presumably lost it all. Critics of Tesla were patting themselves on the back, touting their prior warnings about the company.
As the bad news piled up, Tesla took steps to shore up its finances. It raised $2.3 billion in capital by selling shares and issuing debt. That silenced naysayers who said the company would soon run out of cash to fund operations.
Going into the fall of last year, the drumbeat of negative news lightened up. The company issued several positive statements, and the market seemed to be encouraged.
This past week Tesla’s stock closed at $748 per share, up 300% from the June 2019 low. Tesla is on a tear. In fact, Tesla is now worth more than Ford and General Motors combined. Investors believe Tesla’s future again looks bright.
This is an excellent example of why investing is so darn difficult. Companies can go from darling to dumpster – and back again – in a matter of months. Buying Tesla in June 2019 took guts. The news was grim. The stock was hated.
For many of us, investing is a pursuit that becomes easier as prices increase. We feel validated with each market tick higher. But when prices plunge, that validation vanishes. Fear shifts into high gear. We think of the worst-case scenario. And we think of all the money we lost.
Investing is hard because most people can’t keep their head in the midst of mayhem. Or they get overly excited as prices shoot to the moon.
Buy low and sell high is the simplest of phrases. Apparently, it’s also simple to forget. Investors often do the opposite. When everyone else is selling it is difficult to buy, and when everyone else is buying, it never seems like the right time to sell.
Investing isn’t difficult because of numbers. Numbers are the easy part. Investing is difficult because it involves emotions. Emotion – and more importantly, keeping emotions on an even keel – is the hard part.
More money is lost in the market by giving in to what feels right at the time. The best investors are willing to deal with a large amount of discomfort.
About the time it feels like you are doing it all wrong is usually the point at which you are doing it exactly right. That’s precisely why investing is so hard.