What Goes Up, Must Come Down

Bill Gates once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”

2020 was a spectacular year for investing. So spectacular, many were quick to forget all about the mere  twenty-two days it took for the market to fall 30% at the start of the pandemic.  

During a run like that, it gets really difficult to remain disciplined. Rebalancing and diversification go out the window. 7% annual returns? That's for suckers. Times have changed.

Until they haven't changed. At some point, valuations start to matter. Price matters. Risk management and diversification matter. And trees don't grow to the sky. And while indices continue holding up fairly well, many individual stocks have not. 

Some of these stocks may never recover. Some may not be in business five years from now. For a few, it may be one of many setbacks on the way to becoming a trillion dollar company. Consider the price of admission to earning returns in Amazon. Drawdowns are a feature, not a bug, of investing.

Insiders of publicly traded companies are required to setup what is known as a 10b5-1 plan. It allows for selling a predetermined number of shares at a predetermined time. For example, an executive sells 3,000 shares of stock on the 30th of every other month. It was a regulation enacted primarily to avoid any optics or illusion of insider trading. 

You may not be required to have a 10b5-1. But if you own significant amounts of company stock as part of a compensation plan, setting up something similar would be valuable. Without it, paralysis and inertia become the norm, both during times of euphoria and panic. You become a rudderless ship in the middle of the North Atlantic, thrown around and at the whim of the stock market each and every day. Instead of looking out decades, your time horizon becomes 30 minute intervals, refreshing the ticker throughout the day.

James Clear says, “You do not rise to the level of your goals. You fall to the level of your systems.” A 10b5-1 like sell plan allows for dollar cost averaging on the way out, just like 401(k) contributions go in. A little gets taken off the table on a consistent basis - the most effective way to combat regret minimization. Some on the way up, some on the way down. Additionally, there are other good reasons to sell. The stock may have grown become too much of your net worth. You may have a worthwhile personal consumption to fund. These are all life and financial planning based decisions that proactively drive stock sale decisions.

So yes, stock prices do go down. Sometimes by a lot. Adversity in the moment is never enjoyable. But this is why investors are rewarded with long-term returns that stocks historically have provided. Just make sure you have a system or plan in place to aid decision making both in good times, and in bad.

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^{Source: The Compound Newsletter (12/11/21). Looking for the next Amazon (Irrelevant Investor)}