When a Great Investment Goes South: How to Handle It Like a Rule #1 Investor

Have you ever bought a company you believe in—down to your bones—and then watched the stock price fall by 30%, 40%, even 50%? Yeah, me too. And that experience is a real gut-check moment, even for seasoned investors like me.

What I want to walk you through in this post is how I think through these kinds of situations—how I stay grounded in Rule #1 investing principles even when the market appears to be screaming that I got it wrong. Because sometimes the best investment decisions are made not when everything is going great, but when things feel like they’re going wrong.

What Happens When the Market Disagrees With You

Here’s the deal: Rule #1 investing is simple. You buy a wonderful business. You buy it when it’s on sale. Then you wait. And waiting—doing nothing—is where the money is made.

But simple doesn’t mean easy.

Let me share a real-world scenario. I bought a company I believed was worth $150 per share. I got in at $75—what I thought was a fantastic margin of safety. But then the price dropped to $50. On paper, that looks like a bad investment. But is it?

If you understand the business and nothing fundamental has changed, the price drop might just be noise. But if something has changed—especially something you missed during your initial evaluation—then it’s time to reassess.

"You’re not wrong because nobody agrees with you, and you’re not right because everyone agrees with you." – Warren Buffett

Reevaluate—Don’t React

When a stock drops significantly, it's easy to doubt yourself. But rather than react emotionally, I challenge myself to reexamine the business with fresh eyes. Have new facts emerged? Did I make a faulty assumption?

In this particular case, I sent my analysts to investigate a key $2.6 billion asset in person. The valuation assumptions we had made about this asset were solid—but not bulletproof. Once we dug deeper, we realized this part of the business would take longer to generate cash flow than we originally expected.

That insight changed the valuation. Instead of being worth $150, the business might be worth closer to $100—still above my purchase price, but a lot closer than I thought.

So I had a choice: panic, hold, or buy more. And that brings us to the next crucial principle.

The Power of Margin of Safety

A margin of safety is your buffer. It’s what protects you when your assumptions don’t play out perfectly (because let’s be honest, they rarely do).

If I’d bought that company at its full value of $150, the revised estimate of $100 would have been a painful hit. But I bought it at $75. Even if the new valuation is $100, I’m still holding a solid investment. And if the stock drops further—say to $50—I can buy more and lower my cost basis.

Example:

• Bought at $75

• Reevaluate value at $100

• Price drops to $50

• Buy more at $50

• Average cost basis becomes $62.50

That’s a built-in cushion that helps me sleep at night.

Don’t Confuse Assumptions With Speculations

Investing requires making assumptions about the future. But not all assumptions are equal.

Assumptions based on solid evidence—like understanding a company’s cash flow, management quality, and durable competitive advantage—are different from wild speculations about the market or economy.

If your investment hinges on perfect conditions or optimistic guesses, you’re gambling—not investing.

Assumptions are okay. Speculations are not.

Stick to what you can know and verify. For me, that sometimes means going to the source, asking hard questions, and adjusting timelines if needed.

Time Horizon Matters—But So Does Realism

Even when you’re investing for the long term, timing still affects value. Cash flow today is worth more than cash flow ten years from now. If the business is solid but it will take 15 years to realize its full potential, that affects what I’m willing to pay.

It’s just like buying a rental house. If rents won’t go up for a decade, I’m not paying a premium today.

The key is to make conservative estimates, use a margin of safety, and be honest about how long you’re willing to wait.

When in Doubt, Stay Humble

Here’s something I’ve learned the hard way: confidence is good, but humility is better. When the market punishes your stock, ask yourself: What might I have missed? Be open to the idea that you got something wrong—and be willing to reevaluate everything.

Because even if the business is great, the price you pay determines your return. And the market, while often irrational in the short term, is still worth listening to.

Eventually, this is going to work out. But how long are you willing to wait?

Final Thoughts

A falling stock price doesn’t always mean you were wrong. But it does mean you should pause and recheck your homework.

If your investment thesis still holds, and the company is truly wonderful, and you bought it with a margin of safety—then a price drop may be a gift, not a problem.

But if something has fundamentally changed, don’t ignore it. Reevaluate with honesty and rigor. That’s the Rule #1 way.

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