Lessons learnt from Micron

Financial Horse is on the road this week, but I managed to find some time to hammer out this article. It’s a topic that’s very close to my heart, and one that I’ve been yearning to write for quite a while: The lessons that learnt from the emotional rollercoaster that is Micron.

Micron was one of the first few shares I picked up when I was starting out in investing, all bright eyed and bushy tailed. It’s also one that taught me many valuable lessons as an investor.

Basics: What is Micron?

Micron Technology, Inc. (NASDAQ: MU) is:

an American global corporation based in Boise, Idaho. The company produces many forms of semiconductor devices, including dynamic random-access memory, flash memory, and solid-state drives. Its consumer products are marketed under the brands Crucial and Ballistix. Micron and Intel together created IM Flash Technologies, which produces NAND flash memory.

Source: Wikipedia

In other words, it’s an American company that produces DRAM and NAND flash. They have a plant in Singapore as well, so you may have heard of them before.

You can take a look at their 5 year chart below, marked with the point when I initiated my position in Micron. Trust me when I say that it has not been an easy ride.

Emotional Rollercoaster

Let’s take a closer look at my decision making process and emotional well-being at each step of the way:

(1) Initiate Position

I originally initiated a position at around $30 a share. It had come down a fair bit from its peak price of $35, so I thought I was getting a pretty good bargain. After all, DRAM is an oligopoly (competitors are Samsung and SK Hynix), and in an oligopoly, it is in the interests of all parties to refrain from price competition, such that they all enjoy fat profit margins. Micron’s other big cash cow is NAND Flash, and SSDs are flying off the shelves these days. The stock is also trading at a Forward P/E of 8. What could possibly go wrong?

(2) Time to average in

The doubt began to creep in. Perhaps I was too early in my buy? But after putting some thought into it, I convinced myself that the growth story was still intact. If I were comfortable buying at $30, surely $21 would make it a 30% better buy. I thought that if I were to average in now, I would enjoy bigger profits when the share eventually rebounds.

(3) Holy shit what is going on

This was absolute rock bottom. DRAM was in a state of oversupply, and this destroyed profit margins. Every single analyst out there was downgrading this stock to single digits. It was missing earnings after earnings.

I briefly contemplated selling my entire stake in Micron. After doing the sums, it worked out to a 70% paper loss, so I basically get almost nothing back. I felt that I was better off praying for a rebound.

I also contemplated adding to my position at $10. I felt that fundamentally the stock would eventually pick up one day, given the strategic importance of its products. But emotionally, I just couldn’t get myself to pull the trigger. When you’ve seen a share fall 70% from its highs, no amount of intellectual reasoning could get you to buy more.

(4) Time to back up the truck

The easiest time to buy a stock is when it is going up. This was no exemption. After the share price had recovered 100% from its bottom (from $10 to $20), this gave me the confidence that perhaps my original thesis was right after all. I finally picked up the courage to add to my position.

(5) Oh yeah baby…

Throughout its run from $20 to $60, I felt like an absolute baller. The only regret was not putting more money into Micron when it was at $10.

(6) Damnit should have sold…

After the fall from $60 to below $50, I started kicking myself for being too greedy. I was already on a 150% gain at this point in time. I could easily have sold at 60 and been done with this stock.

But again, the rational part of me knew that this stock was still ridiculously undervalued, and that there was still room for upside.

(7) Road to 100 dollars baby!

At this point in time, the stock was beating every single earnings report, and analysts were upping their price targets on a weekly basis. Many pundits even predicted that this stock was going to $100.

It started feeling a bit like irrational exuberance, and this worried me. I’ve learnt over time that when everyone becomes overly optimistic on a stock, that’s usually a good contrarian indicator.

(8) Present Day

Fast forward to today, the share is trading near the mid 50s. It’s a long way up from $10, but still a little down from its 52 week high of $64. Should I have sold when it was in the 60s? Is this stock on its way down, or taking a pause before it resumes its upward rally?

Lessons learnt

You can be absolutely right about a stock, but absolutely wrong on timing.

It turns out that I was spot on in my original thesis that rising demand for  DRAM and NAND Flash would prove to secular headwinds for Micron. Unfortunately what I got absolutely wrong, was the timing. I failed to take into account the fact that increasing supply from Micron’s competitors would contribute to a dramatic fall in DRAM prices that destroyed Micron’s profit margins.

The lesson here is that you can be absolutely right in your long term thesis for a stock, but in the short term, the share price can go anywhere due to short term factors beyond your control.

Dead DPS do no DPS.

When I was younger, I was a huge fan of World of Warcraft (WOW). In WOW, players can form a 40 man raid team, to tackle an incredibly power monster for rewards. There is a saying in WOW that “Dead DPS do no DPS”. I am sure the gamers out there will understand this, but for the benefit of everyone else, it is the idea that as a damage dealer, if you are dead, you do absolutely no damage. Accordingly, it is better to play safe and survive, than to play aggresively only to die and do no damage.

This is a very powerful concept. Transposed into investing, it is an important lesson in why leverage is so dangerous. Imagine if I had used leverage for my Micron investment. When the share price fell from  $30 to $10, chances are good that I would have been stopped out of my position, and missed out on the subsequent rally. Sure, I could have set a stop loss and exited my position, and then reopened it at $10. But that’s with the benefit of hindsight. If the same events were to happen to me again, I highly doubt I would have had the courage to reopen a position had I been using leverage.

For fundamental investors such as myself, stocks should always be viewed as a long term investment. And many times, a stock has to go down before it can go up. If you use excessive leverage, you may not be able to survive the downs.

If you truly believe in something, you should put your money where your mouth is.

There is an important lesson here that if you truly believe in something, you should go all in on it, diversification be damned. I had many opportunities to add to my position when the stock was at $10. Each time, the rational investor in me knew that this was a fantastic price to add, and that it was a matter of time before the stock would rebound, given the secular headwinds in place.

But emotionally, I absolutely could not bring myself to buy more shares after a 70% fall. As investors, we always talk about how we missed out on a great opportunity when we failed to buy UOB at $8 during the previous financial crisis. But what I can guarantee you, is that the next time UOB is at $8, it is going to be incredibly hard to pull the trigger, because there will be a hundred and one reasons you use to convince yourself why this is not the right time, why the stock will fall even more or why you need the cash for other reasons.

If there is one lesson I learnt here, it is to familiarise myself with the emotion I felt when Micron was at $10, to recognise this emotion, and fight it the next time I feel it.

Good things take time.

As fundamental investors, it is crucial to recognise that we are not betting on short term fluctuations in market price. We are betting on long term improvements in a company’s earnings. Once you see yourself as a business owner, you can view your investments with a totally different lens.

If I had focused solely on the fact that a share that I had bought at $30 had a 70% fall in value, I probably would have sold it.

By thinking of myself as a business owner of Micron, and rationalising whether I would sell my company after a 70% fall in its market value due to short term declines in DRAM prices, I managed to convince myself to hold on for a little longer.

Commodities are highly cyclical.

This was a more specific lesson that I picked up along the way. And it was this: Commodities are a highly cyclical business. Individual participants have absolutely no pricing power as the products are identical. Accordingly when supply is low and demand is high, prices go through the roof and all players profit. This is the boom cycle. When prices are high for extended periods, the existing players invest heavily in capital expenditure to increase their output. This raises the supply, and with demand staying constant, prices fall. All players suffer, and it starts a new bust cycle.

It was one of those Economics 101 lessons that I learnt about in school many years ago. But seeing it applied in real life, to an investment that I owned, was a very powerful lesson.

No matter how big the players are, there really is no getting away from the fact that commodities is a cyclical business. It can be DRAM, oil, or precious metals, but the concept is the same. All commodities (and commodity related shares) trade in boom and bust cycles.

Closing Thoughts

I recently attended a UFC fight where the loser, one of the best fighters in the world, graciously explained that he lost partly because he was sick that morning. When queried on whether he would have skipped the fight had he known the outcome, he pondered a while, and replied that he would still turn up, and lose. The reason? Because, in his words, “I love this shit”.

And that made perfect sense to me. If I were given a choice whether to take a nice 150% profit now or go through the emotional Micron rollercoaster again, I would pick the latter without a doubt. Because I truly love this shit.

Successful investing requires one to blend an understanding of the micro (the company, its valuations, strategy, management, earnings etc.) as well as the macro (industry dynamics, movements in financial markets, investor psychology, political sentiment etc.). When you get it right, there is no better feeling in the world. When you get it wrong, it is just another important learning point in a lifelong learning journey, and you live to fight another day.

Over the course of my lifetime, I am 100% convinced that there will be many more opportunities such as Micron out there. The key is to learn from my mistakes, and to ensure that I never repeat them again. “Fool me once, shame on you. Fool me twice, shame on me.” The next time this happens, and I fail to buy my “Micron” at $10, there is no one to blame but myself.

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Financial Horse has a set of 7 Commandments for Successful Investing, that I ask myself before making every investment, and that I will never break regardless of the situation. Enter your email below to receive a copy in your inbox!

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