Monday, November 26, 2012

Breaking Up (with your stock) Is Hard To Do

Don't take your love away from me
Don't you leave my heart in misery
If you sell then I'll be blue
'Cause breaking up his hard to do

Two years ago I bought this great stock because I thought it was an outstanding investment at a fantastic bargain price.  But now it is a terrible stock and is down 22%. 

So it looks like I was wrrr … 

I was wroooo…. 

I was wrong. 

And here lies a serious problem for large investors and small investors alike.  When it comes to investing money, we all become like Arthur Fonzarelli (the Fonz), we hate to admit we are wrong.  This denial causes us to hang on to “bad” stocks for way too long. 

Psychologists tell us that it causes great emotional distress to admit that we have made an investment mistake.  Investing mistakes are more agonizing because the loss is financial and quantifiable.  This tendency is much more prevalent in men than women due to the “male ego” effect.  Women dump losers more quickly (just like in single bars) and this is why women investors (both professional and individual) tend to outperform men in studies evaluating gender and investing. 
To admit you made a mistake, you must try to resolve the fact that out of the thousands of stocks, mutual funds, EFTs and commodities available, you actually made the conscience decision to buy this one.  And boy did you screw up this time! 

But you couldn’t really be that stupid, could you?  So you begin to lie to yourself.  It really isn’t a bad stock, it’s just that some bad things have happened to it.  Good things are going to happen soon.  If I just wait, the stock will recover and will even make money just like I expected.  Then I won’t be stupid, no I will be an investing genius, just like Warren Buffet. Oh yeah!   

But it doesn’t usually work that way.  Typically the stock continues to slide until it hits a bottom and then stays down there for a long time.  You hope it comes back, but this hope is not based on reality. Sadly, the Easter Bunny never shows up with any “recovery” candy. 

I am writing this because I just sold off one of my losers.  About two years ago I bought this highly-recommended, popular, utility stock.  It offered solid growth potential with a great dividend.  I got it at a “bargain” because some temporary factors had knocked down the price.  The stock was so good that I bought more than usual (I now have a personal limit on how much I invest in any one stock). 

Initially the stock performed as I expected.  The price went up and I almost bought more when it bounced back a little.  But then the economy slowed and demand for electricity waned.  Natural gas prices dropped which made this particular utility’s cost of production less competitive.  Finally, some  negative internal information about the company leaked out which involved politics.  Of course this bad publicity received much attention in the middle of an election campaign. 

Then stock of course began to slide.  It never dropped much at one time.  But the negative pressures listed above resulted in a slow leak over time.  Of course I told myself that this was just temporary, that the slide was illogical and would stop very soon.  And the dividend, the dividend was still strong so I could afford to wait for the stock to return to profitability. Then the viability of the dividend came under question due to the weaker company balance sheet.  And then I asked myself why major investors weren’t buying large chunks of the stock considering the dividend was even better due to the lower price?

Remember when you held me tight
And you kissed me all through the night
Think of all that we've been through
Breaking Up Is Hard To Do

So I sold the stock.  And even though I believe everything I have written in the post, it still hurt to sell the stock.  It still was distressing to admit I had made this mistake.  The brain says “yes”, but the heart still says no.  But if you are going to become a good investor, you got to know when to “fold ‘em.

Breaking up with your stock is indeed, hard to do: 

Investario: I’m sorry Stockeeta.  It’s over between us, I’m leaving you. 

Stockeeta:  Please, no.  I know my returns are down, but it’s just a cycle I’m going through.  I’ll change and you will be happy with me once more. 

Investario: Look Stockeeta, I was first attracted to you by your high yields, but your returns are sagging and there are other choices available with very attractive profits. 

Stockeeta: But the dividends! I have always provided you with very satisfying dividends!  

Investario: Yes, but word on the street is that your dividends will be much less satisfying in the future. I’m sorry, this is goodbye. 

I beg of you, don't say goodbye
Can't we give our love another try
Come on baby, let's start a new
'Cause breaking up is hard to do

Tuesday, November 13, 2012

Train Wrecks and Washing Off the Slime

You say "Goodbye" (or in my case, “Bye, Bye”) and I say "Hello, hello, hello".
I don't know why you say "Goodbye", I say "Hello, hello, hello".
I don't know why you say goodbye, I say hello

(Since we started with the Beatles, an alternative song could have been “Help” and some people would have even gone with “Back In the U.S.S.R”!)

Well, Hello Mr. President
American has spoken and apparently we are satisfied with economic growth of less than 2% percent.  The good news is that at some point we will exceed expectations, the bad news is the bar has been lowered.
This blog has gotten more political than I want it to be this year, but this was the result of having a presidential election during difficult economic times between two candidates with starkly different economic philosophies.  With that said, here are my final economic/political observations for this cycle:
Economic Growth: Just because Mitt Romney had a five-step plan, it wasn’t guaranteed to work and would have taken some time to implement.  In addition, his tax plan sounded like something designed to get votes instead of solid tax reform.  If President Obama (it hurt some to type that) leaves the economy alone and does not clamp down on the domestic energy boom, there is hope for an eventual stronger recovery.  The U.S. economy has a tremendous ability to heal itself.  Once the “Fiscal Cliff” gets resolved I expect GDP to make it over 2% (woo, woo).
Job Growth:  Romney planned to “create” 12 million jobs in four years.  However presidents can’t actually create jobs, they can only create an environment that is conducive for job growth.  Unfortunately President Obama (ouch again), had problems grasping this concept in his first term, let’s hope for a change in term two.   Even if job growth remains at its current slow rate for the next four years, the economy would still add around 8 million jobs.  This is “only” 4 million less than Romney’s plan, which is still significant if you are currently looking for work.  However, job growth should start to increase (again through self-healing) soon and continue to grow over the next few years.  I would not be surprised if the economy adds the 12 million jobs (without Mitt’s help) over the next four years.
Obamacare:  This is a huge mess.  The system was destined to fail because it costs too much and couldn’t be paid for (without huge additional tax increases).  But now we learn that while many were crying over the Supreme Court ruling on the individual mandate, the court also ruled that states do not have to implement the expansion of Medicaid provision.  The states also can opt out of creating the insurance exchanges.  The federal government is then supposed to set up the exchanges, but there is no money allocated to do this. 
In addition, the economic law of unintended consequences is starting to kick in big time.  Restaurants, hotels and other industries that use many part-time workers plan to cut workers hours to avoid the added cost of Obamacare.  It is also expected that small businesses will stop growing when they reach 49 workers to prevent paying higher healthcare costs.  Businesses (and individuals) will continue to make decisions that circumvent provisions of the law to save money.
Unfortunately, this is a train wreck that we get to watch from inside the train.
Rejecting a Business Mogul as President:  In June I wrote two posts advocating electing a business person as president.  While I still believe we needed someone who understands business running the economy, a business mogul has liabilities as a candidate.  Americans want their president to have core convictions, even if they don’t agree with all of them.
A business mogul only has one core conviction: What makes me money? It is what makes the tycoon successful and requires that he changes direction as conditions change.  Romney tried to use this strategy for political success but in politics this is labeled “flip-flopping”.
President Obama displayed more core values than Romney and core convictions beat no convictions every time.  Sometimes an election comes down to the question of “Who will screw me less?” and many voters decided they couldn’t trust the rich guy.
An Apology:  I apologize to any of my readers who may have been offended by anything that I wrote over the last few months that they perceived as too politically biased. I promise that I will not write anything politically oriented ever again, unless of course somebody does something economically stupid. 
Excuse me, I am now going to take a shower and wash off all this slime.