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| Adrian Mastracci, president of KCM Wealth
Management, says, "My sage advice to investors is stay
clear of getting married to stocks. The love of stocks, especially
falling stocks, impairs investment judgement." |
For Immediate Release
Vancouver, BC (May 17, 2002): Investors love dancing around
the mulberry bush with falling stocks. As an example, our darling
Nortel disappointed again recently. What a surprise!
Adrian Mastracci, president & fee-only investment counsel
at Vancouver based KCM Wealth Management comments, "Chasing
persisting disappointments is a passion for many investors. Of course,
while Nortel is Canada's darling in this category, it is only one
of several. And more falling candidates to choose from are added
daily to every investment neighbourhood."
"Falling stocks attract the love of many investors,"
notes Mastracci, "Worse yet, investors marry the lovable stocks
and stand by them no matter what. Apparently, the rules of prudent
investing don't apply to this special category."
"The familiar script is replayed often," remarks Mastracci,
"Say an investor is attracted to Nortel and bought in at $100,
then at $60, then more at $30. Well, that investor must be price
ecstatic by now. And, of course, complete with intense frustration
too!"
"The frustration is understandable, but rethinking the ecstatic
part might be beneficial," observes Mastracci, "The better
bet may be to run for cover from the falling stars."
"I won't try to explain why investors love to chase stocks
that keep delivering more downside potential," muses Mastracci,
"That is, unless investors have the courage to short them!"
"My experience is that savvy investors know how to handle
falling stocks," indicates Mastracci, "Yes, the initial
losses hurt. However, they know that chasing falling stars is a
low percentage, hit and miss strategy."
"Selling a losing stock is difficult for many investors. Instead,
they often add to it with the hope that it will bounce back to breakeven
or better," Mastracci explains, "If the expected turnaround
doesn't materialize, or is long in coming, the losses can run unchecked."
So what should an investor do to curb this affliction? Consider
my five point approach:
- The reasons for getting married to falling stocks are not important.
The real question is whether existing losses are sufficient reason
to reduce the investment position.
- What is most detrimental to retirement portfolios is not incurring
losses. Rather, it's chasing and keeping the losers too long.
- Astute portfolio managers can admit to being wrong about a
stock gone south. Being wrong doesn't make a bad portfolio manager.
Staying too long with the falling star is the downfall.
- When falling stock strategies don't deliver on expectations,
it's wise to act like a professional. Stop the chase, take the
loss and move on.
- If a stock is worthy of the chase, make sure it's one that
has potential for increased earnings.
"My sage advice to investors is stay clear of getting married
to stocks," indicates Mastracci, "The love of stocks,
especially falling stocks, impairs investment judgement. That's
the last thing an investor needs."
"Falling in love with stocks is a quick way to inflict some
portfolio damage," suggests Mastracci, "Instead, save
the emotions for that special person."
"Every loss starts out small. Use sound judgement in pursuing
stocks worthy of the chase," concludes Mastracci, "Invest
like a professional -- that first loss may well be the best loss.
Moreover, second guessing is not allowed."
Mastracci summarizes, "The medicine tastes awful, but the
investment experience improves. So, will the nest egg."
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