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By: Adrian Mastracci
North Shore News
Business Section, “Loose Change”
Sunday, June 23, 2002
Investors love dancing around the mulberry bush with falling stocks.
As an example, our darling Nortel disappointed again recently. What
a surprise!
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. 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. 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. 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. That is, unless investors
have the courage to short them!
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.
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. 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. 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. Instead, save the emotions for that special person.
Every loss starts out small. Use sound judgement in pursuing stocks
worthy of the chase. Invest like a professional -- that first loss
may well be the best loss. Moreover, second guessing is not allowed.
The medicine tastes awful, but the investment experience improves.
So, will the nest egg.
Note: The prescribed
interest rate on loans to a spouse will rise to 3% on July 1st,
from the current 2%. Considerable benefits can be enjoyed by having
all documentation in place on or before June 30, 2002. The same
applies to company loans to employees and shareholders.
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