Taking Big Dumb Risks

When you’re young you often take big dumb risks. You just don’t know it at the time. Most times you don’t get hurt.

Hopefully, as you get older, you realize this. That just because you didn’t get hurt doing something dumb doesn’t mean you didn’t take a big risk and get away with it.

When I was 28 years old I flew to Ghana. It’s a small west African country. I traveled the country by bus.

One day I came across a guy working near a small pond. He asked me if I wanted to ride a crocodile for a small fee.

“Hmm. Okay!”

So he walks over to a little shack and comes back holding a few live chickens. Then we go to the edge of the pond.

Sure enough, the squawking chickens lure a few massive crocodiles onto shore. The guy flips a bird into each crocodile’s mouth.

Then he tells me to go sit on the back of whatever crocodile I want. So I go sit on a crocodile. The biggest one of course. For the picture.

Just because you didn’t get hurt doing something dumb doesn’t mean you didn’t take a big risk.

You see this in the stock market all the time. Do you remember the frenzy with the retail stock GameStop? For months, the shares traded around $10 to $20. Then in early 2021 the price shot up to $483!

It’s natural to celebrate the people who bought shares at $20 and sold at $400. That’s an enormous gain. A 1900% return.

But you never hear about the people on the other side of that trade. The ones who bought when the price was $400, hoping to sell even higher. Instead, the price plunged to $40. These are the people who got hurt.

As luck would have it, I owned GameStop. I purchased shares for $12.50 in 2018 and happily sold at $38.47 during that climb to $483.

Why was I happy to sell for so little?

Firstly, a stock that goes from $12 to $38 is a 208% return. That’s a higher return than I expected. More than I wanted, really. Never risk what you have for what you don’t need.

Secondly, if the market offers you a generous price feel free to take it. I didn’t think GameStop as a business was worth more than $38 per share. So, I sold.

The thing to know about investing is that price and value are different things. There’s an old saying you might have heard: “Price is what you pay. Value is what you get.”

Maybe an example would help?

Okay, take Microsoft. In the 1990s Microsoft was growing incredibly fast. They were selling software, and software didn’t require you to build expensive factories and buy lots of machinery and source raw materials and so on. Instead, you paid developers to code something one time and then sold as many “free” copies as possible. By late 1999, investors had bid up Microsoft’s stock to $61.09.

Then the stock price plunged and went sideways. It took 16 years to get back to $61.09.

Why? The price went up too much, too fast. When you steal too much “price” from the future it can take years for the value of the business to catch up. For it to grow into its price.

Which reminds me of this old Wall Street joke. Have you heard it?

Customer: Thanks for putting me in XYZ stock at 5. I hear it’s up to 18.

Broker: Yes, and that’s just the beginning. In fact, the company is doing so well now, that it’s an even better buy at 18 than it was when you made your purchase.

Customer: Damn, I knew I should have waited.

Joking aside, sometimes a stock really is a better buy at a higher price. It took me a long time to understand this. That investing has little to do with price, and everything to do with value.

Here’s a specific example from my own portfolio.

In 2012 I purchased Apple at $20.50 per share. At that time Apple was earning $1.58. That means the price to earnings ratio was 13 (20.50 / 1.58 = 13). P/E is a simple method to value stock.

In 2016 I purchased Apple again. This time I paid $23.04 per share. Apple was now earning $2.25 per share. That makes the P/E about 10.

The stock price was higher, but it was a better value, because the P/E was lower. You’re getting more earnings power for your money. (But remember, stocks aren’t only about past earnings. They’re about the future.)

After I started thinking about investing in terms of value I realized price is mostly irrelevant. It’s just what you pay. Value is what you get. That’s the key to investing safely.

Anyways, I know it’s easy to feel jealous when you see other investors getting rich fast. There will always be people swinging for the fences. Throwing hail marys.

You read headlines about the ones who survive: “How this 27-year-old made $378,000 options trading in one month!”

But remember, just because someone didn’t get hurt doesn’t mean they didn’t take a big dumb risk and get away with it.

Like riding a crocodile.