The Stock That Had Me Convinced I Was Stupid (Part 3)

Last update on June 22, 2013.

In parts 1 and 2, I begain to talk about First Solar, which is a company I invested in. In part 1, I explained why First Solar stocks dived from $300 a share to under $30 a share. In part 2, I explained why I decided to invest in First Solar.

In this podcast, I explain how the investment panned out.

 

 

Transcript:

Hello, and welcome to MoneyGeek's podcast. My name is Jin Choi and in this episode, I'll continue from my last episode and talk about my experience investing in First Solar.

In the last episode, I explained why I decided to buy First Solar shares, and I explained that I bought 200 shares at $26 a share. To give you some context, this was roughly about 8% of my investment portfolio at the time, so it was definitely a significant investment for me.

After I bought, things kept getting worse for the solar industry. Natural gas prices continued to plunge, which meant that it was becoming a no brainer for utility companies to build natural gas plants. Chinese solar panel costs kept going down as well, and this forced First Solar to cut their prices further. Europe wasn't looking any better.

As a result, First Solar stock kept diving. It went from $26 in March, to around $20 in April, and then to around $16 in May. That was about a 40% loss.

On May, I re-evaluated my opinion on First Solar, and I still concluded that this was a $90 stock in 5 years. I mean, nothing much had changed. If anything, because of the lower stock price, it was an even better investment opportunity then.

But of course, my emotions disagreed with my brain. I had lost $2,000 of my hard earned money by that point to this stock. Day after day after day, I saw First Solar stock go down. Did I really believe that I could make money after all this? To get back up to even, the stock needed to go up by more than 60%. It felt like I would be lucky to break even.

This is when a lot of investors tap out. They sell their shares, because they listen to their emotions, rather than their brain.

Often times, they listen to their emotions because their brain doesn't have much to say. I'm not saying they're necessarily stupid, but what I'm saying is that people often buy stocks without thinking about what they're really worth. In my mind, First Solar was worth $90. But other people don't have a number in their head, so when their emotions say 'sell', their brains don't object.

In other times, people's brains will say that it's worth more, but they let their emotions cloud their thinking. They think, well, maybe the other investors are right - maybe First Solar is worth only $16 a share. They must know something I don't. In other words, they let their emotions persuade their brains to rationalize a new number.

Thankfully, I knew that my emotions could play tricks on me, so I decided to man up, and do the opposite. I went out and bought another 200 shares at $16 a share.

Less than a month after I bought these additional shares, First Solar shares went to less than $12 a share. In other words, it went down 25% from the time I bought my most recent shares. Overall, I had lost over $3,500 of my hard earned money on a stock that was going down everyday. First Solar now needed to double, for me to get back to even.

Boy, did I feel stupid.

I'm a very rational guy, but even for me, there's a limit. My brain told me to buy more shares. After all, nothing had changed. It was still worth $90 a share. But my emotions said, 'Get out. Sell your shares. You're wrong, and the sooner you admit that, the better'. In the meanwhile, every expert on the solar industry was telling everyone to get out of solar stocks. The future held nothing but trouble for them.

This time, I couldn't quite bring myself to ignore my emotions completely, and follow my brain's advice. But I did the next best thing. First Solar was held in my taxable margin account, so I transferred over my shares to my TFSA account. That way, at least I could claim capital losses on my margin account.

Thankfully, that was to be the worst of my suffering. First Solar shares went back up to $15 because their management forecasted better than expected earnings. Then in August, the shares went up again to $20 a share because unlike what everyone thought, First Solar was still earning money.

At this point, I decided that I couldn't handle the wild ups and downs, so I sold 200 shares at $20 each. That still left me with 200 shares worth $4,000.

A few months later, a big news broke. On October 2012, the U.S. department of commerce ruled that Chinese solar companies were charging unfairly low prices. As a result, they decided to impose tarriffs ranging from 18% to 250% on Chinese solar cells. This obviously gave First Solar a huge advantage over their Chinese competitors, so their stock began to rise.

By December, First Solar stock reached $29. For the first time, I was making a profit off of my initial shares purchased at $26 a share. Rationally, I should have held on, but I remembered how painful it was to see my shares drop to $12. Who says it couldn't happen again? I decided to sell 50 shares. First Solar traded around this range for a few months.

Then on April 9, I woke up to find that First Solar was going up by 40% in a single day. Apparently, they acquired some solar company that developed a much better kind of solar cells. I didn't know if investors really believed this was a game-changing technology. Personally, I suspect that investors panicked.

Remember, there were a lot of investors who were short First Solar stock. So when prices went up, these investors suffered losses, and they decided they couldn't handle the pain. To give up on shorting a stock, they needed to buy the stock and return it to whoever they borrowed it from. This pushed First Solar prices up, which made the pain worse for other investors who were short the stock. This is what's known as a 'Short Squeeze'.

On this day, First Solar stocks went up to $37. At this point, I re-evaluated my thinking. I still thought that this was a $90 stock in 5 years. But now at $37 a share, I was going to get 19%/year in returns. It was good, but it was no longer great, if you considered the emotional rollercoster I went through. Plus, I needed some stability, now that I was living off my savings trying to develop MoneyGeek. I sold the rest of my shares at $37, which about 40% higher than when I originally bought the shares.

As per usual, I sold it too early. Today, First Solar shares trade at above $40 a share. I still think it's going to $90 in a few years. Time will tell whether I'm right. But I have no regrets offloading the shares when I did.

I hope you enjoyed this story about my investment in First Solar. Hopefully, this gives you a glimpse into the way I think about investments, and how the stock market really works. As you can see, sometimes, the markets are far from efficient, which creates opportunities for people like myself.

Thank you very much for listening, and if you want to get updates on my blog posts, don't forget to sign up for our newsletter. Have a great day.

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