Why Am I Holding On To Some Of My Losers?

There is a range of opinions about how to handle a stock that isn’t quite panning-out the way you had hoped.  Some people will tell you to hold on at all costs and for as long as possible if you still believe in the long-term outlook of the company.  Others will advise you to cut your losses short no matter what, after a 15-20% loss in the case of one of the stock-investing-advice services that I’m subscribed to.

In my case, the most recent prices in my portfolio show losses in just over half of my holdings.  Should I be freaking out or not??  Here are some explanations about why I’m holding on to them:

1.  I didn’t know better!

To put things into perspective, my portfolio as of this writing has only two “stinkers”, in other words what I call stocks with greater than a 20% loss.

In the case of National Oilwell Varco (NOV), which is currently 26% below my buy price, I – like most people – really didn’t think the recent dip in the price of oil would be this severe or have happened so quickly.  So I started to watch the corresponding dip in the price of this company’s stock starting last summer without a plan in place as it dropped back toward my buy price.  And I was REALLY stumped about what to do as it started to drop below that price!

It has been only in the last couple of months that I’ve learned a great tip about cutting your losses short, specifically by ditching a stock once it loses 20% in a bull market (which the same advice service says we’re still in, by the way) or once it loses 15% in a bear market.  If I had followed that advice, I would have lost only 6% less than I’m losing now, but that’s still 6% less!

So one option for me would have been to cut my loss on this stock and, according to this same advice service, re-invest the money into one of my winners.

HOWEVER, I’ll be holding onto NOV mainly because it will be one of the first oil-related stocks to quickly recover from a rise in oil prices because of its global dominance as a supplier of oil and gas equipment.  Also, when I own shares in an industry juggernaut like NOV, I’m not really concerned about its performance if I plan to hold it for the long-term, which twenty months as of this writing certainly is not.  It’s important for me to remember the precise reasons like these about why I got excited about buying into a particular company in the first place when it seems as though the chips are down.  It gives me a clear-headed perspective and thus the strength to keep holding on.

I also really hate selling at a loss.  It’s not just a wounded-pride thing, but I also have to remind myself that every single quality, large-cap stock I’ve ever owned has always returned into positive territory when I’ve held it for long enough.  The problem is, I haven’t always had the patience to done this.  Plus, if I do cash out and put that money into something else, will that ‘something else’ actually re-coup my losses?

2.  All of them are only recent buys

For my stocks that have dropped less than 20% (6 of my holdings), statistics prove that I’m a fool if I decide to sell them before at least a 3- to 5-year time frame.  In fact, one of the services I’m subscribed to blatantly tells people not to buy a single one of their recommendations unless this is their absolute minimum time frame.

Even Warren Buffett mentioned in an annual report that nobody should buy any Berkshire-Hathaway stock unless they plan to hold it for at least 5 years.  (I personally got too impatient with my BRK.B shares a while back, sold them, then watched them rise at least 20% since.  It was one of those rare times in the past two years when I’ve ditched a stock in favor of another that I think might do better.  I wouldn’t recommend doing this!!)

So based on this criteria, all of my stocks are recent, short-terms buys because I’ve owned them all for less than 3 years – in fact, less than 2 years.

My InvenSense (INVN) holding, for example, is down nearly 24% in 14 months.  Why am I not even flinching?  I’ll explain why in more detail below, but first of all, I’ve only owned the darned thing for just over a year!  Why on earth would I sell so soon?  The problem is, the gambling types would sell this soon!  And gamblers in the stock market never, EVER win – well, at least not in the long term.  (More about them later.)

3.  I invest a lot less into small-caps than large-caps

Regarding my INVN holding, another reason why I really couldn’t care if they even dropped 94% is because with such small-cap holdings, I typically only invest 1/2 to 1/3 as much into them as I do into a large-cap like Apple, Under Armor, or Starbucks.  If it only makes up a few percent of my portfolio, then it really doesn’t bother me.  One rule-of-thumb is that the total of such small-caps shouldn’t represent more than 20% of one’s portfolio, anyhow.

4.  All my eggs aren’t in one basket

If you’ve read any of my other posts, I apologize for the eggs-in-one-basket cliché, but it’s such an important trap to be wary of.

If I had ‘bought the ranch’ by putting most of my money into only NOV, INVN, and maybe one or two other stocks, then the hit in my NOV and INVN would have dragged my entire portfolio into really negative territory.  But since I own 14 stocks in total (with plans for over 20), who cares that my NOV and INVN are down?  I sure as heck don’t!

However, I personally know some people who get excited about one stock and put most of their money into it.  Then they flinch and sell too soon instead of riding things out over the long term because they’re worried about their over-weighted position in that stock.  Actually, make that a third person I personally know, who lost most of the $150,000 that he put into a single stock based on a tip from from an acquaintance back in the early 1980s.  No research, no consultation, just his life savings into ONE SPECULATIVE STOCK based on a tip from an acquaintance!!!!!

I realize that represents an example of stock gambling to the extreme, but people will often do just that with smaller amounts when they’re looking for a quick fix which, contrary to popular misconception, the stock market was not designed to be, unless you’re looking to lose your money FAST.

Important final thoughts (PLEASE read!!!)

I’ve mentioned in other posts about the gambling mentality that most people approach the stock market with, as though it’s some sort of a guaranteed, get-rich-quick scheme.  So they dump a pile of cash into one or a few stocks, usually in the same industry (ex. gold mining stocks) and usually cheap-o stock ones like penny stocks (because they think they represent the greatest potential for a fast return), then eagerly rub their hands, waiting for a home-run.  Then a few weeks later, maybe a few months, they withdraw their leftover scraps, in some cases only a tiny fraction of what they started with, and blame the market for “robbing” them or “screwing” them out of their money.

If you treat the stock market like a one-armed bandit, then it will reward you like one.

If you treat the stock market like a long-term wealth appreciation vehicle, then it will reward you like one.

Maybe my portfolio might not be too convincing at this point, so in this case I appeal to the track records of folks like Benjamin Graham, Warren Buffett, and the brothers David and Tom Gardner.  Holding several quality stocks (at least a dozen) across a wide range of industries over a long time frame (absolute minimum of 3- to 5-years) has statistically proven to be the hands-down best way to accumulate wealth – several times more profitable than real estate, than precious metals, than even other stock-market investment vehicles like mutual funds.

And this realization is the number one reason why I’m holding onto stocks that currently appear to be losers, because I know that all of them are quality, and therefore most – if not all – of them can eventually be great winners if I just hold onto them long enough.

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