SIMON BROWN: The horror, the horror of owning a horror stock

Knowing when we’re wrong is hard, and admitting it is even harder. In life in general this is made even more difficult because whether we are wrong could be debatable, and because we can always find a reason for why we’re not wrong.

But in the markets it’s different; we know we were wrong by the results and the price action. You bought a stock expecting it to shoot the lights out with excellent results and a much higher share price. But instead, the results are a horror show and the share price collapses. You were wrong — there is no debating that.

But it is still often hard to admit, and harder still to then do the right thing. The right thing is to check where you messed up in your research, and if you did, to acknowledge it and exit the position.

It’s all too easy to blame the markets, the Fed, your stock broker or anybody who’s not you. But there is no upside in that response.

We’ll all have a holding or two in our portfolio that is just a horror stock. It was bought with high hopes, but now everything has gone wrong; the stock is way below the entry price.

Yet you hold on in hope that a miracle will get you out of the hole. You fixate on the price you paid and the money that was lost, but neither of those facts changes the reality: you own a horror stock.

What we’ll often do is promise to sell when we get back to breakeven. But remember the maths: a stock down 90% needs to recover 1,000% to be back at breakeven.

Maybe we buy more to reduce the average price, but this actually increases the money we’re throwing at a horror stock.

The truth is, the money is gone, and the question you should be asking is: could the money in this horror stock be better invested elsewhere?

While you’re waiting for the horror stock to recover, many other shares are probably rising whereas your horror stock is not.

The question I ask myself in this situation is whether I would buy the stock now if I weren’t already holding it. It’s going to be hard here to answer truthfully; we’re invested, losing money and emotional about it all. But an honest answer is a must.

If that answer is no, you wouldn’t be buying now, why are you holding it? Then the response is simple: sell it.

Work through your portfolio, focusing on the horror stocks, do the above exercise and then sell those that really are horrors that you no longer want. Sell at whatever price you can get. This is not about making money, it’s about reducing stress and using the money in stocks with better prospects.

A final tip: having sold the horror, just delete the stock from your watch list and never look at it again. There is no joy in the stock, only pain.