Andy Feng
Warren Buffett has been credited with saying we need to be “fearful when others are greedy and greedy when others are fearful,” and that includes NIO (NYSE:NIO), which has been under enormous pressure, primarily from slowing economic growth in China, as well as its zero-Covid policies that remain in place, even as most of the rest of the world has opened up.
The other major factor has been the overall decline in global economic growth, which has caused investors to flee riskier high-growth stocks and move capital to the sidelines, or to take positions in perceived safer stocks.
In the last article I wrote about NIO, we looked at the various headwinds NIO faces and why I retained a positive outlook on the EV maker. Headwinds talked about included “the recent delivery numbers released by NIO, as well as why it’s vital that shareholders and potential investors embrace a long-term holding outlook when and if taking a position in the EV company.”
In this article, we’ll focus more on the investing psychology concerning NIO and the strategy to play it if you’re interested in taking a position in the EV company.
The psychological factor
In the past, NIO has been a highly volatile company in association with its share price movement, and it would predictably move up and down in response to news cycles and company announcements.
Psychologically, you knew you could take a position in the company on pullbacks and end up making money on the rebound. I personally did this numerous times and made a significant amount of money doing so.
The key there was to wait if the share price fell further than expected and add shares when the price dropped in order to lower the cost basis. For now, that way of looking at and investing in the stock has to be abandoned because of the lack of positive catalysts at this time that would bring about a nice rebound in the share price of NIO.
Investors interested in the EV sector and NIO in particular, now need to change the way they view the stock. It no longer lends itself to being a day trade or swing trade holding because it no longer has the volatility it had in the past.
With that in mind, the only way to think in terms of investing in NIO would be to hold it for the long term. Or, if already in the stock, buying more shares on the dips.
The question to ask is this: has anything in the long term changed in the growth outlook for the EV industry? If not, then it’s only a matter of extending the time horizon for holding NIO, as the company has positioned itself strongly for growth once economic conditions improve and supply chain issues resolve themselves.
The other factor is the zero-Covid policy of China, which is another element in the growth cycle which will occasionally cause disruptions in forward momentum.
Last, we have the policies of the Federal Reserve that have to be considered for the short-term outlook for high-growth stocks. In that regard, my view is it could continue to raise rates to about 5 percent; it could be a little lower than that or a little higher, but not likely much more than 5 percent at tops. The reason why I believe that is the cost of servicing the U.S. debt would be prohibitive, so I think we would be in the ballpark to think in terms of 5 percent, or a little higher, as the number to make decisions on.
This is important because the U.S. dollar, being the reserve currency of the world, has an enormous impact on the economies of the world, and in particular, growth sectors which are impacted by higher borrowing costs.
How to play NIO at this time
The first thing to consider with a company like NIO is, whether or not to take a position or not. If you’re uncomfortable with doing so, then your best play is to not take a position at all. Why argue with others online as to the future potential of NIO if you aren’t convinced it’s going to return to being a significant growth company over time?
On the other hand, if you believe, like I do, that this is only a temporary period of stagnation for NIO, then there are a couple of things to consider when deploying your investing strategy.
As mentioned above, we have to extend our timeframe for investing in NIO from the short term to the long term. From there, just set it and forget it if you have deployed all the capital you want in the company.
The first thing to consider is position sizing. Assuming you believe in the future potential of NIO, you still need to take a position in the company that allows you to sleep at night. If there is any type of discomfort in your mind when considering how big a position to take, simply lower it until you feel comfortable.
Not only does this provide peace of mind, while being a wise strategy to employ, it also provides the framework for the next part of your strategy, which is dollar-cost averaging.
For those that may not know, dollar-cost averaging means taking a portion of your overall position size and buying into a stock in intervals over a period of time; that allows you to, especially under current market conditions, have a decent dollar cost average in the stock.
Using position sizing and dollar-cost averaging will provide a good position in the company which, barring unforeseen Black Swan events, to enjoy the inevitable return to a sustainable, upward growth trajectory for NIO.
For those already in NIO, ask yourself the question as to whether or not you’re comfortable with the position size you have in the company. If you are comfortable and don’t mind adding to your position, the current share price of NIO provides a good opportunity to lower your cost basis.
That doesn’t mean the share price has hit a bottom, but it is at a good enough price that it’ll put you in a stronger position for when the economic turnaround comes.
If you believe the share price has further to fall, then by all means wait. For me, I like to take opportunities when they come because you never know if the share price has reached a bottom.
As for concerns over a recession, I’m already making investing decisions based upon the idea we’re already in one, which by historical definition over the last 70 years, we are.
Conclusion
For many investors, the best way to play NIO if you’re not convinced of the future of the company is to not take a position at all. Why take a position in a company that you don’t have a solid conviction about after taking into consideration its fundamentals and the temporary nature of the macro-economic global conditions?
For those that still believe nothing has changed in the EV sector or the long-term growth trajectory of NIO, like I do, it’s now a matter of taking a long-term view of holding the stock.
If you don’t have a stake in NIO now but are considering doing so, take into consideration how much of an overall position size you want to have before deploying any capital, and then use the strategy of dollar-cost averaging to get a lower cost basis. That will position shareholders for nice returns in NIO when the inevitable growth cycle returns for NIO. It’s not a matter of if, but when.
My view is many investors will regret not taking a position in NIO once economic conditions improve, supply chain issues are fully resolved, and NIO takes advantage of its formidable production capacity and growing range of vehicle models it’s offering to the public.
I understand many readers are under water with NIO at this time, but it’ll eventually reverse direction, and when it does, patient shareholders will be rewarded.
Psychologically, the thing to understand and embrace is it’s going to take longer than many of us thought a couple of years ago.
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