When I was growing up I was a bit of a loser. Not that I was a bad kid or anything. I just found myself in losing situations more than I felt other kids did at my age. Maybe we all feel that way in our teens. Or maybe it’s just the sting of losing is so much more powerful than winning. But that’s the way it felt.
One of the things I would hear a lot growing up a lot was: “If you are going to lose, don’t lose the lesson. Always look for the lesson.”
When bad things happen, I immediately look for the good or a counterpoint to focus on. Trying to find the seed of good in a bad situation. This past month one of my stocks took a nose dive. It fit all of my targets but it didn’t behave accordingly. Invest in stocks long enough and you will find that this happens more than you would like.
I watched this stock fall over 60% in one day. This is why I don’t recommend or share stocks that I buy. Heck I don’t even like to share it with my friends and family. Not because I always pick losers (though I’ve had my share) but because knowing the name of a stock is how most newbies invest. Before I go any further I will not say if I still own this stock or if I have since sold it.
Here are the lessons I have learnt from investing in a losing stock.
1 – The Need for Portfolio Allocation
What can I say, the old adage of “don’t put all your eggs in one basket” is true. Portfolio allocation means that you don’t put anymore than a small percentage of your money into any stock (usually 3% and never more than 5%).
When I first saw this stock I thought it was a gem. It had a 17 year history of raising it’s dividend, and it was yielding a nice percentage. Plus the yield was higher than it’s 3-year average, so I figured I had found another winner.
When I see stocks like this I often want to go all in on them. It’s a bad habit. This all or nothing mentality that I have tried so hard to shake always pops up with investing. It’s a demon I have practiced quieting. I’m lucky I followed this rule.
2 – Keep Your Losers In Perspective
While losing money on stocks is never good. I have to look at the fact that because I never allocated more than 3% of my portfolio to a single stock it led me to be better protected when Mr. Market decided to hammer this stock by 60% in a single day.
It was bad. But what would have been worse is having a higher percentage of that one stock in my portfolio and taking a bigger beating on my overall portfolio. There is a reason why you don’t put all your eggs in a single basket. Especially when it comes to stock picking.
By only allocating 3% of my portfolio, the loss in total was 1.8% of my overall portfolio, that’s a lot easier to take than say putting my whole life saving into this stock and losing 60% of it in a single day
3 – Create Investing Rules and Stick to Them
Before you start investing you should have some ground rules. One of mine is that I hold it for a minimum time period. This prevents me from jumping in and out of stocks when I get an itchy trigger finger. Yet another demon I have to quiet.
Since this timeline was still in effect I have to decide if the rule is worth breaking or if I’m going to whether the storm. Which leads to…
4 – When the Story Changes, You Need to Reassess
Buying this stock met my dividend criteria. Once news came out about the stock and the reason why I bought the stock changed, it was time to reassess.
5 – Cut Losers
I should have sold this stock when the bad news started but honestly this is usally where I come in as an investor. When a stock is doing bad it is often a good point to come in if you have the time to temper the storm. Or it can be terrible too (you never really know). Patience and temperament to handle stocks like these are important. When the stock took a nose dive I waited, maybe I shouldn’t have but time will tell if selling would be the right move. Now that the dust has settled it’s time to make the decision on what I should do.
If you are getting into investing, you are eventually going to experience some bad times. They will hurt more than the good times will feel good. That’s human nature. Pain is always more powerful than pleasure. Just be prepared for it. Have your rules and accept that the plan may need to change over time.
Another lesson is that individual stocks are a tricky investment. Some can be great but nobody’s track record is perfect. If you aren’t able to temper the storms then keep away from individual stocks and invest in broad market efts and use robo-advisors like Wealthsimple where you will get a $50 bonus for signing up.
How to get started with Wealthsimple and Get a $50 Bonus
My Review Of Questrade and Get a $50 Sign Up Bonus
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Great post, Andrew!
Love the idea of keeping the loss in perspective. If you’re diversifying well, big hits will feel like small hits.
Thanks Tim. It’s taken a lot of losses to gain some perspective. I guess the loss was my gain?