SIMON BROWN: When investing is all about the losers
How you treat the losers in your portfolio is as important as picking the winners
Investing is easy, right? You buy the best companies and hold while they increase in value and pay you dividends. Over the years and decades ahead, you create wealth.
Except that’s not what happens and your portfolio may well be littered with stocks that are in the red, maybe even deeply so.
Or maybe they are green, but by such a small amount you need to squint to really see the gain.
So what does one do with a losing stock? The first thing is not to panic; rather, ask yourself a bunch of questions about the company you own.
Most importantly, why did you buy it? Was it a FOMO stock and you got it at the top? Here you’ll need to dig into the numbers and the story: are they still compelling or were you truly hoodwinked? If the latter, then exit.
Was it a deeply cyclical stock such as the PGM miners and you got the timing wrong? Sure, the cycle will turn in time and they will once again become the darlings of the market, but how long will this take? Again, you need to review the profitability of the company in question, the demand for the commodity and its pricing. If the trend shows no sign of reversing any time soon, exit.
Hot tips are never a good idea and when they fail (as they nearly always do) just sell and walk away
Maybe it was a hot tip from around the braai after winning the rugby? Hot tips are never a good idea and when they fail (as they nearly always do), just sell and walk away.
Maybe you just got things wrong: you saw a wildly cheap stock that looked as if it had great earnings potential, but those earnings collapsed or disappeared. Here again, admit you were wrong and exit.
It may have been a deeply speculative position; that is, you bought a beaten-down stock in the hope that it would recover and you’d make a fortune. But it hasn’t recovered and is now deeply in the red, causing you stress every time you log on to your online broker. Again, just get rid of it.
One trend you’ll have noticed about these dogs is that we all have them in our portfolio at some point. They lose us money and cause us emotional stress and we promise ourselves we’ll sell as soon as they break even. You need to stop waiting for them to break even. Get out, remove the pain and put the money to work in a stock that is actually heading higher, not lower.
Also check if this is stock specific or maybe the entire sector is under pressure, or maybe even the entire market as we saw with the pandemic crash in early 2020.
Maybe the company is just going through a tough patch, thanks to a deal that didn’t work out as planned, or the arrival of a new competitor. Review the stock as if you did not own it; would you buy now? If not, exit. If the answer to that question is yes, continue holding.
Finally, remember the point in the first paragraph about years and decades. Give it time. If it passes all the questions mentioned here, remind yourself that investing is a long-term process and even winners may need time to show their true colours.
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