Thursday, July 21, 2011

Stock Investing: I Love You Man!

Ever been "in love"?  Ok. Ok... "really liked' someone?  It's great when we first meet someone and start to develop a relationship.  But here's the question... ever broken up with someone?  How did you do it? 

I'm sure many have experienced the "breakup".  It's not fun. And psychologically (and emotionally) we normally don't really want to hurt someones feelings.  So there are many techniques many go about in trying to sever ties with someone.  You can obviously go face to face and say "It's not you, It's me" and "It's for the better".  Or in today's technology world, you could call and leave them a voicemail (not likely these days though as they might answer, ugh)... or better yet, an email or even better a text message!!!  Nothing says "I care about your feelings" when someone breaks up in a text message!  Then of course there's the old spend less time, talk less, and maybe (hopefully) "they'll get the hint". 

OK. Now take that logic as to why we sometimes go to great measures to "let someone down easy" and think about investing.  I say this because sometimes there is a tenancy for heart to take over the brain when it comes to investing in your portfolio.  Some people get "attached" to their stocks.  And when a stock is underperforming or starts to lose value and hurt the portfolio, we have to ask them "Why so attached?"  Did the company text you this morning to wish you a good day?  Did you get a birthday card from your stock company?  Christmas Card?  Truth is... the stock you "love" so much doesn't seem to be loving you back all that much (especially if there is no dividend attached... read the Drip Drip Drip Blog).  Many will often say "Oh, I've had the stock for years.  I couldn't possibly let it go." 

Why not?

When it comes to investing, you have to try hard to take the emotion out of it.  It's okay to have a position for years as long as that position continues to do what you want them to do inside your portfolio. 

My favorite quote that I've heard over the years regarding stocks that have fallen in value is "It'll come back". To which I might ask, "When?"  Tomorrow?  Next Week?  Two Years?  Five Years?  Truth is, you're not sure when they will come back or if they will... but you love them so much!

Take Microsoft for example.  Take a look at a 10 Year chart:

Easy to say most like Microsoft the company.  I mean it is a multi-billion dollar company!!  If you are a PC user, you like Microsoft (or not).  If you had invested in the company 10 years ago, you would have paid around $29.  Today, it's running around $27.  (granted, MSFT has posted some dividends lately... about 40 cents a year... little over 1% in dividends each year since about 2006. That was 1% for those keeping tally).  That would mean you are down about $2 bucks after 10 years.  Down about 6.8% after 10 years (and actually you might be even with the 1% you've received in dividends since 2006... Now that's Love!).  Who would have liked to have had "the talk" around $35?  And then maybe "asked them out again"... around $20 or even $15.  Please understand, I'm not saying Microsoft has always been a dog.  Many Many people made a fortune off this company and stock.  But, those that came to the party a little late and held it thinking it was going to $400 like Apple, might be asking "huh?"  "Where's the love?"

Making that hard decision to cut them loose is tough.  Can't really send your stock company a text message or an email.  Can't leave them a voicemail.  Heck, you can't really go face to face with them and say "It's me, not you."  Sometimes we try to go the grade school route and ignore them.  We don't open our statements, we gloss over them in our portfolio... after all we "love" them.  Maybe they'll get the hint and go away?

Nope.  If you have to cut them loose, you have to sell them and move on to a new position (new love interest?).  The worst time to cut them loose is when you have lost money.  That's the worst because you 1. Don't want to admit to being wrong and 2. If it comes back up in value, they won't love you anymore (you start to second guess your relationship... something to that effect). 

Investing is like a business... you have to have a Plan and Strategy, with Goals and Objectives.  If a stock isn't working for you properly to meet those plans, strategies, goals and/or objectives, then it's time to make a hard decision for the portfolio and say "bah-bye".  Obviously, the best time to "break up" is when they have performed well for your portfolio. But who wants to break up when things are going well?  Exactly!  Hence why you want to establish a plan to avoid the heart taking over. Maybe you put a rule in place... if it goes up 20%, then it's time to part ways (more on that strategy down the road).  Put something in place that disciplines you.

"It's been fun and we've had some good times, but it's time to move on to bigger and better."
... it'll be better for you in the long run.

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