Price is counterintuitive

When it comes to goods and services, sales and deals are always promoted, “smart” consumers look to buy at opportune times or clearances to secure the best deals. Pricing psychology and marketing is a massive business to train us to buy a certain product over another.

However, when it comes to investing in stocks, all this conditioning and sale-seeking habits can be incredibly detrimental to your success. Price is counterintuitive, and untraining those habits can help propel your portfolio.

Sales/discounts/deals

Common advice given to investors is to “wait for a dip”, “buy the pullback”, but when the dip keeps dipping, what do you do? “Average down!” they say. “Dollar-cost averaging works over the long run!” they shout at you.

Yet if you actually did these things you would quickly realize that at best, it doesn’t work as well as it seems like it should on paper, and at worst, your stock continues to tank until you’re either too scared or in too deep and it never recovers. Worse yet, you tell yourself you’ll exit when it gets back to breakeven but the stock teases you repeatedly, coming just shy of breakeven, before eventually going bankrupt and never allowing you an exit.

This is a common hurdle in every investor’s journey to profitability, and yet many never manage to see the trap for what it is and never manage to dig themselves out to meet the next challenge keeping them from consistent gains. I’ve experienced it myself, and have seen many friends and family that I coach go through the same struggles.

During the dotcom bubble, you would have been buying steep discounts over and over until you deployed all your capital far above the bottom, giving you a poor average cost, then were forced to hold these unrealized losses for (in many and the best of cases) 10+ years before even dreaming of breaking even while forgoing infinitely many opportunities with that capital.

• Amazon ($AMZN) 11 years until making a new high, 95% drop peak to trough

• Microsoft ($MSFT) 16 years until making a new high, 75% drop peak to trough

• Cisco Systems ($CSCO) 90% drop peak to trough, has yet to fully recover after 21 years

Pricing power

Why does indiscriminately buying cheap stocks that have dumped off a lot tend to be a trap? Let’s pretend for a second that these stocks represent offerings and services (surprise, they do!). Sales and discounts are generally offered to get rid of an excess of stock (not the shares, the product). In cases where items are expiring and about to lose all their value[1]eerily similar to how option decay works as option expiration approaches in grocery stores, or an old item is no longer being produced, steep clearance type sales occur. A company that needs to offer steep discounts/clearances has one or more of the following problems: lack of demand, inconsistent/poor product quality, supply chain/inventory issues, etc. Needless to say, none of these are desirable traits for an investor to expect profitability on

Lack of pricing power is not an indicator of a strong company, never mind a company that is a leader in its respective space. Apple ($AAPL) rarely if ever puts its products on sale. It does not need to price its products in the same price range that the average Chinese retailer might need to. It’s able to command sky-high prices time and again, and count on its loyal customer base who know and love its products to clear out their supply. Apple is able to sell more than any other company whilst commanding high prices. When there is no lack of demand relative to supply, prices go up.

Low prices beget lower prices. A company whose stock price is being discounted by the market tends to continue to have its price discounted until sufficient buyers are found to counteract the supply in shares. This does not tend to happen whilst the company stays on its current trajectory that the market has deemed unfavourable. If meaningful and significant change comes, the stock price may turn around again, and fetch higher prices, hopefully sustainably. This is the basis on which bearish and bullish trends are created.

Low prices beget lower prices

Another thing I’ve noticed that is not immediately intuitive to new entrants in the stock market is that in addition to sale-seeking behaviour, it’s expected that something that drops 90% only has up to go. This is a simple misconception that can be easily debunked using math, or less ideally, experience. A stock purchased at $300 is down 90% upon hitting $30. When the stock gets to $3, you’re down another 90% even if you bought or doubled down at $30. The stock is now down 99% from its high and at serious risk of being delisted altogether, never mind all the underwater people looking to exit every time price tries to move up, creating excess supply.

This is not a fantasy scenario, if you do a review of the stocks in the stock market, you’ll find this happens time and time again, even to strong stocks facing serious headwinds or fear. Even more companies you’ll never find because the charts and tickers no longer exist as they are out of business. Even Amazon ($AMZN) dropped 83% from Dec 6 1999 to Oct 16 2000, from $113 to $19.39 split-adjusted. After dropping 83%, it lost another 71% by hitting $5.51 on Oct 1 2001. Worth noting this sustained drop took 2 whole years. Since then, Amazon has returned over 683x or 68,300% from the bottom as an incredibly rare and dominant player. 99% of beaten-down stocks do not share the same fate.

My learnings from Tupperware

As mentioned in my about me page, I’ve been fortunate enough to have stumbled across a couple opportunities (and mistakes) that had a significant, life-changing impact on my portfolio, and more importantly, my understanding of the stock market. One of these opportunities were Tupperware ($TUP). Perhaps I’ll write a deep dive on this play in the future, but for now, I’ll use it as a tale of a caution against bottom-fishing, buying discounts, and “averaging down”.

Tupperware was a name I’d heard many times over the course of my life, so imagine my shock when I saw this company that had a brand synonymous with food storage container as a household name like “Bandaid” or “Kleenex” was at $16~$18 years after making a high of $97.14. This piqued my curiousity and I looked into the company further. Without going into the reasons why I decided this was worth a punt, I decided to allocate a total of low 5 figures into a play on $TUP, expecting an eventual bounce to at least $32, where some buying occurred before it created new all-time low prices.

My trade plan was as follows: I’d wait for $TUP to hit $5 before deploying 16.66% of intended position, as the trend was down and more down was to be expected. This allocation was in case the stock blew up without me and I simply didn’t want to deal with the pain of feeling I missed it. Somewhere between $1.5 to $1, I’d 5x my existing position, completing my full risk allocation.

Needless to say, Feb 2020 came along, my $5 buys filled, then it quickly dropped another 80% to nearly $1. With the backdrop of COVID-19 panic and broader market sell-offs, I suddenly became very frightened about buying around $1 as planned. My mind was convinced that the possibility of $TUP going bankrupt was much higher than whatever figures I expected going into the trade. Luckily I overcame my fear and followed my trade plan and process, which was also something that took me quite a while to learn previously.

Weeks later, Tupperware announced new directors to its board, new CEO, and eventually a turnaround plan. I quickly saw my account break my own personal all-time highs, and my $TUP shares were worth more than any amount of money I’d ever had before. I was fully satisfied and sold my shares at $28.

Despite the massive success that this trade was, seeing an 80% drawdown in my position was vastly different than thinking about it. Investors tend to overestimate their ability to follow their plan and underestimate the real, crippling power their emotions can have over them in the moment, causing massive, lasting damage to their net worth.

A few months later, I made another life-changing play in Gamestop ($GME) using more initial risk capital, which was a much harder play to time and execute but paid off tremendously. Except this time, I took my learnings from Tupperware and made necessary adjustments to minimize my downside while realizing extraordinary gains and avoiding doubling down and bottom fishing. It didn’t have to be so hard, and I felt like a fool after realizing it, but I really needed to experience it and make sense of it holistically myself for it to click.

Buy high, then sell higher

Simply put, assets are things that produce future expected value. As an investor, you should be seeking out assets to grow your portfolio over time, and avoiding stocks that are not on that trajectory lest you want your assets to be “bags” that pull you down. Ensuring that a stock is in a bullish trend is key to accomplishing this. Shake off the silly notion of “the price is too high” as touted by others — price is only too high if no one is willing to buy it from you higher.

When Bitcoin hit $100 for the first time, few could truly envision it going 100x higher to $10,000 even if they saw the potential and understood cryptography and blockchain. I believed tremendously in Bitcoin since I first came across it in 2011, but it’s hard to visualize something going up 100x higher when it’s putting in a steep, daunting peak. When Bitcoin hit $20,000, few could see it hitting $60,000 as fast as it did.

Bitcoin, of course, is special as it’s a once-in-a-lifetime type of breakthrough in “sound money”, but thousands of stocks have made runs of similar magnitude. It’s only when the next run has occurred that the current “peak” that’s so steep and daunting suddenly shrinks to a line on the chart, barely visible to the naked eye.

The key is not going back in time and loading up on Bitcoin at $5 or lower, although you should definitely do that if you can! What was pivotal for me to throw away my notions of price being “too high” was realizing that in order for an asset or stock to land a 3x, 5x, 10x, 20x 50x, 100x, 1000x, it needs to first double. Let me repeat that again: for a stock to 1000x, it must first 2x. A $100 stock simply cannot hit $10,000 without first reaching $200 on the way. It may be an elementary concept but this realization helped reframe my beliefs about price.

For a stock to 1000x, it must first 2x

By reframing the way we evaluate price, it then becomes exceedingly obvious that a stock near its all-time lows is the least likely to provide astronomical returns, and a stock near its all-time high is a more likely candidate to accomplish that feat. There is no need to fear a stock that has tripled simply because it has tripled, or jump to buy a stock 90% down simply because it’s 90% down.

That said, it’s important to note that with steep ascents come steep declines, and as always, it’s imperative to keep risk in check and be diligent with practicing risk management. Landing a 100x or 1000x on your investment requires luck, but you will not be around for luck to change your life if you wipe out your portfolio before then.

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