Don’t catch a falling knife

January 14, 2016

This is a saying I learned the hard way.
It relates to the stock market. If a company is failing, do not buy. And do not hold on hoping it will come back up. Bail asap. Don’t catch a falling knife. You’ll only hurt yourself.

During the stock market boom of the late 90’s, there was this broadband company called @Home. I was a complete stock market newbie wanting to make money fast. This one family friend quit his day job as a nurse and supposedly made a big killing day trading. He told me about @Home.

@Home was a company that was poised to sink from the beginning. They didn’t own any of the pipes in the ground, but rather leased them from cable tv providers like Comcast. It was only a matter of time til the big boys jumped into the high speed internet game.

At that time the stock as around ~$130 I think. And I bought at the peak. I had no idea about reading 10-k’s, balance sheets, cash flow statements, financial analysis. As soon as I bought, the stock started plummeting. $120. $100. $90. $70. $50. $30. The whole time the knife was falling, I assumed it would bounce back up. I even bought more stock at times. Wishful thinking. @Home went out of business. Since then, I have no emotional connection to stocks. If they start misbehaving, I cut loose asap. Or better yet, try to buy companies that have a very low chance of falling.

This rule applies to everything.
You know the feeling you get when you get a lap dance at the strip club? If you’re a normal human being, at some point you start feeling bad for the girls. You start imagining them as your sister or mom or someone. A downtrodden person. This is the classic cliche. Guys wanting to save strippers. And the girls take advantage of this by milking you outta cash. They can’t be saved. They’re falling knives, falling buddhas, falling souls. And that’s ok. Maybe that’s the journey they want to experience in this lifetime. They can only saved if they want to be saved. Let the knives fall, don’t stick your hand out there.

In Warren Buffet’s biography, there’s a story of a falling knife. One of his kids or sisters had a friend who was a lost cause. Constantly on drugs, trying to get his life together but couldn’t. At a pivotal point, the family member asked Warren if she could borrow some money to save this guy. Warren refused. Later the guy was found dead, of a drug overdose. I don’t know if Warren made the right moral choice, but maybe he knew that this guy could not be saved. And he didn’t want to enable him by giving him money.

Unless you plan on being a saint like Mother Theresa, devoting your whole life to saving people, it’s best to avoid people/places/things that will take you down with them.