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| Adrian Mastracci, president of KCM Wealth Management, says “My experience is that savvy investors know how to handle falling stocks. Yes, the initial losses hurt. However, they know that chasing falling stars is a low percentage, hit and miss strategy." |
For Immediate Release
Vancouver, BC (April 29, 2004): Investors love dancing around the mulberry bush with falling stocks. As an example, our Canadian investment darling Nortel disappoints again.
Adrian Mastracci, 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 many.”
“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 was attracted to Nortel and bought in at $100, then at $60, then at $30 and even more under $15. Well, that investor must be price ecstatic by now. And, of course, complete with intense frustration too!”
“The frustration is understandable, but rethinking the price chase part might be beneficial,” observes Mastracci, “The better bet may be to run for cover from falling stars. Awful as it seems.”
“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 affection of falling stocks?
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 does not 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, lick your wounds and move on.
- If a stock is worthy of the chase, make sure it’s one that has potential for increased earnings. That's a prime reason why stock prices go up.
“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.”
“The last thing an investor needs is bonding at the hip with an investment gone awry,” points out Mastracci.
“Falling in love with stocks is a quick way to inflict portfolio damages. Besides, they make lousy partners,” suggests Mastracci, “Instead, save the attachment and 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.”
“No second guessing please,” Mastracci summarizes, “The medicine tastes awful, but the investment experience improves.”
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