Do I know of anybody who has lost everything in the stock market?

[Wildreamz]

Let's start the ball rolling on loss-sharing.

Currently I'm "bagholding" a biotech company (Novocure, NVCR) sitting on 50-60% drawdown. Currently my biggest lost on a percentage basis till date, realized or unrealized.

Will losses balloon to 80-90%? Maybe, but I think it still make sense to hold it, for the long shot (if one of their many medical trials in Phase III yield successful results, their earnings could 10x or more). Currently around <1% weightage.

Risk-reward calculus seems favorable. 

IMHO, you can be both rational and suffer huge losses on any single position.

[i4value]

The only reason you are holding onto the shares is because your analysis shows that the intrinsic value is higher than the market price or even your purchased cost. If you don't have any analysis then you are merely depending on luck. Risk reward must be based on some business analysis. Otherwise you are just speculating. There is no harm speculating provided you know that is what you are doing and not pretending that it based on some research.

[dreamybear]

Currently I'm "bagholding" a biotech company (Novocure, NVCR) sitting on 50-60% drawdown. Currently my biggest lost on a percentage basis till date, realized or unrealized.

Will losses balloon to 80-90%? Maybe, but I think it still make sense to hold it, for the long shot (if one of their many medical trials in Phase III yield successful results, their earnings could 10x or more). Currently around <1% weightage.

Risk-reward calculus seems favorable. 

any advice as to how does one go about "understanding the business" for a layman without the necessary technical medical background (referring to myself   ) for such companies ? I wld think there are many other companies in the "medical trials" arena, no ? How does one evaluate which of these companies are the ones having the highest chances of success with the biggest addressable market size/fewest substitute treatments/longest runway, etc ? I wld also think it is difficult to assess a favorable entry price ?

[i4value]

Warren Buffett has famously said that we should stick to our circle of competence. This mean looking for businesses that we understand. It is tough to start looking at new sectors. One way to get started is to look at analysis done by others. Site like The Motley Fool and Seeking Alpha are good sites to start. Read about the sector, annual reports of many companies. At the end of the day there is nothing like doing your own analysis and then comparing them with what others have done

[Choon]

I am very sure that if you talk to a group of people who have engaged with the stock market, you will find that everyone would have lost some money at some point in time.

The likelihood is that half of the group would probably have got richer at the expense of the other half.

But human nature is such that if you ask the group whether they have lost money, and you ask in public, you will find that almost everyone will say they made money.

Do I know of anyone who has lost everything in the stock market?

The likelihood is that you won’t find retail investors among this group as I don’t think any retail investor would have bet all their savings in the stock market.

But do I know of owners of listed companies who have lost everything in the stock market? Yes, because owners tend to have all their net worth invested in the company they founded.

In the Asian economic crisis, many Malaysian owners lost everything. This is partly because they borrow money using their shares as collateral.  When the market fell, they started to buy more shares to support the share price so that the banks would ask for more collateral. This worked in “normal times”. 

But in a widespread economic crisis, the market fell longer than the owners could have the cash to support the share prices. The result is that many lost everything when the banks forced-sold the shares (when the borrowers could not come up with more collateral).

The moral of the story - the people who lost everything are the owners who borrowed. Those who did not have any debt survived and got over the crisis. So, don’t borrow to invest.

Retail investors lost some money but I have not heard of any retail investor losing all. So, asset allocation and diversification is important even if you don’t borrow to invest.

Even if you are a trader, you would have your stop loss to prevent you from losing all. Of course if you don't have a stop loss, your are an idiot that deserves to lose all.

The above is extracted from the article An Introduction to Value Investing - confronting value traps

I think "So, don’t borrow to invest." is too absolute a statement.

If one has the mentality that the market does not offer buying opportunities every month but only offers buying opportunities once every 2/3 years, I think it is not risky and certainly advantageous to take on leverage at that rare moment to invest.

What is more and most important is about selecting quality companies with growth potential at low prices.

If one is a salaried employee, one then repays his margin financing with his stable salary over the next 2 years.

Otherwise, how then does one practice what Charlie Munger said about, "betting heavily when the odds are overwhelmingly in your favour."

But may I ask what are you trying to achieve by your investing website? To educate retail investors out of a sense of goodwill so that hard-earned money is not lost on poor investment decisions?

[i4value]

The advise not to borrow is because you don't know the future. You don't speculate how long you hold onto a stock. So you don't want to add financing risk to your investing risk. There are many ways to invest. But if you see investing as a life-long journey, you want an approach that enables you to sleep peacefully at night. So I have a conservative approach and this starts with not borrowing.

[LionFlyer]

i have an acquaintance that does not invest in the stock markets or any form of equity. He explained that his dad suffered significant losses back in the "97 Asian crisis and the family was in a bad state.

Events and situations like this often cause traumatic mental scars that block any rational decisions.

[ghchua]

Hi Choon,

If one has the mentality that the market does not offer buying opportunities every month but only offers buying opportunities once every 2/3 years, I think it is not risky and certainly advantageous to take on leverage at that rare moment to invest.

Look harder. Markets will offer you opportunities every now and then. It is risky to market time and just say, hey, I just invest everything once every 2/3 years at low prices in "quality" companies. What if the market continue to tank? Quality companies can also come under pressure during difficult times. When times are difficult, it is about survival and not about trying to maximize a company's growth potential.

If one is a salaried employee, one then repays his margin financing with his stable salary over the next 2 years.

It is dangerous to assume continued employment in this volatile world, even for a salaried employee. What if he is being retrenched? How is he going to sustain paying down the margin besides paying his bills without a salary?

[Wildreamz]

any advice as to how does one go about "understanding the business" for a layman without the necessary technical medical background (referring to myself   ) for such companies ? I wld think there are many other companies in the "medical trials" arena, no ? How does one evaluate which of these companies are the ones having the highest chances of success with the biggest addressable market size/fewest substitute treatments/longest runway, etc ? I wld also think it is difficult to assess a favorable entry price ?

Right now, investing is a way for me to become a market participant, so that I have skin in the game, while I engage and learn about the world.

Investing in a risky biotech might not be the best way of becoming rich, hence it's only about 1-2% of my portfolio (now <1%).

To me, it's not about understanding the business so much to become an oncology expert, but enough so that you can start allocating asset to it.

As for Novocure, it's business is well documented. Hence, no need for me to rehash. In short, I think there is value holding the company that owns the patents to an entire, unique modality in cancer treatment, ie TTfields (in contrast to Chemotherapy, Immunotherapy, Surgery etc.); with minimal added toxicity to the human body, when used in conjunction with other cancer therapies.

Since it's a physical therapy (just need the equipment); gross margin is high, unit economics is inherently good.

The goal is just to do many trials on different types of cancer, so that we find an applicable, scalable use case for the technology. 

When I started investing in it, FCF was trending higher, so it's basically self-funding. Although, shortly after FCF starts trending in the wrong direction. At this juncture, FCF for the past 12 months turned negative. Risk of investing in it is now higher, market reaction IMHO is appropriate, hence, I'm not allocation more capital to it.

[dreamybear]

any advice as to how does one go about "understanding the business" for a layman without the necessary technical medical background (referring to myself   ) for such companies ? I wld think there are many other companies in the "medical trials" arena, no ? How does one evaluate which of these companies are the ones having the highest chances of success with the biggest addressable market size/fewest substitute treatments/longest runway, etc ? I wld also think it is difficult to assess a favorable entry price ?

Right now, investing is a way for me to become a market participant, so that I have skin in the game, while I engage and learn about the world.

Investing in a risky biotech might not be the best way of becoming rich, hence it's only about 1-2% of my portfolio (now <1%).

To me, it's not about understanding the business so much to become an oncology expert, but enough so that you can start allocating asset to it.

As for Novocure, it's business is well documented. Hence, no need for me to rehash. In short, I think there is value holding to owning the patents to an entire, unique modality in cancer treatment, ie TTfields (in contrast to Chemotherapy, Immunotherapy, Surgery etc.); with minimal added toxicity to the human body, when used in conjunction with other cancer therapies.

Since it's a physical therapy (just need the equipment); gross margin is high, unit economics is inherently good.

The goal is just to do many trials on different types of cancer, so that we find an applicable, scalable use case for the technology. 

When I started investing in it, FCF was trending higher, so it's basically self-funding. Although, shortly after FCF starts trending in the wrong direction. At this juncture, FCF for the past 12 months turned negative. Risk of investing in it is now higher, market reaction IMHO is appropriate, hence, I'm not allocation more capital to it.

Thanks for sharing your rationale; I can see why you entered into a position.    The unit economics part does look pretty attractive.