I went mountain bike riding this morning with a group of guys, good guys, and I got dropped like a hot potato. I could not keep up. Their bikes were dual-suspension, and a couple rode e-bikes while mine was a lowly hard-tail, equipped only with pedal power. It was a humbling experience, but I thought about the parallels between mountain bike riding and investing while driving home.
During the crazy COVID market of 2020, everybody allegedly made money trading meme stocks, Bitcoin, or speculative growth stocks – friends, neighbors, co-workers, relatives, and high-school students. Like my recent mountain bike excursion, I felt the investment world was leaving me in the dust.
Meme stocks were the rage during COVID, and it was a bizarre time as stocks like AMC Entertainment Holdings soared 800%, and GameStop rocketed 3,200%; since they peaked, AMC dropped 73%, and GameStop fell 66%. Other meme stocks, like Virgin Galactic, Bed Bath & Beyond, and FUBO TV, also came back to earth.
Bitcoin was another fan-favorite, soaring mightily during the COVID years before peaking last November. Since peaking, it crashed by 72%. It is now languishing because of the headwinds and difficulties from cryptocurrency companies like FTX and Coinbase.
The ARK Innovation Fund was the poster child for growth stocks during the COVID season. It climbed 152% in 2020, only to fall 23.88% in 2021, and lost 67% last year. The fund owns several stocks that are currently struggling but may pay off big in the future, companies like Tesla, Roku, Teledoc, Draftkings, Roblox, and Robinhood.
So what is the connection between mountain biking and investing? Here is a short list.
- Know your limits. I’m a plodder when I ride, and I go slow, don’t take risks, and know my limits. You may be a gearhead that likes to push the boundaries, go fast, and take significant risks – that’s awesome. You will succeed at mountain bike riding and investing if you know your limits.
- Slow and steady. As I mentioned, I go slow while riding, and I’m in no hurry to finish or set a land speed record. As meme stocks, bitcoin, and Ark Innovation were screaming higher during COVID, no one cared about buying IBM, Pfizer, McDonald’s, Coca-Cola, or, gasp, an S&P 500 index fund; however, they have performed well the past couple of years, rising on average, 24%.
- Cut your losses. While riding this morning, I knew I would not keep up with the pack, so I cut my losses and turned around. I did not want to hold the group back, nor did I want to continue. If your investments are not working, or you’re not comfortable owning them, cut your losses and buy something you want to hold.
- Take Risks. If you want to speculate and take risks, limit your exposure to 3% to 5% of your investment pool. It is okay to take fliers now and then, but don’t commit all your capital because it will cause significant financial damage if it doesn’t work.
- Reevaluate. After I got off the trail, I evaluated my performance. What worked and what didn’t? What could I have done differently to improve my ride? I had several conclusions that will help me next time. If you lost money speculating on meme stocks, bitcoin, or Ark, reevaluate your trades. Why did you buy them in the first place, and what will you do differently next time? You can’t avoid investing mistakes, but you can learn from them.
I love mountain bike riding and investing when I stay within my limits but struggle when I try to push the envelope. If I were younger, my experience today would have bothered me greatly, but now that I’m older (wiser), I dust off my bike and chalk it up to experience.
Once we accept our limits, we can go beyond them. ~ Albert Einstein
January 7, 2023
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.