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

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