Too many intelligent and otherwise savvy people are losing money on their investments, or not generating the returns they should. The predominant reason is investors tend to hold onto their losing investments too long, and sell their winners too soon.
Whether you're just starting out as an investor or you're beginning to pay closer attention to what your broker is doing, you need to have a well-thought-out, balanced investment strategy if you want to stop losing money.
I have been an active investor for the last 28 years. I was a broker, branch manager, regional manager and president and CEO of a major division, all with Dean Witter Reynolds, now Morgan Stanley. The last 15 years I was a senior partner with two investment banking-research boutique firms, the last being ThinkEquity partners. In my career I have met and advised over 5,000 individual investors, have worked with over 150 research analysts and over 100 professional portfolio managers. My work has allowed me to travel with and advise more than 200 publicly traded growth companies.
I've learned a few lessons along the way - from when to buy to when to sell -- that I want to pass along in this series. But first, we need to start where you are.
A close look at current investments
One of the most important attributes of a successful investor is the ability to understand and control personal emotions. Emotions play devious tricks on us. When a stock or mutual fund is way up in value, our emotions run wild: "Should I sell? Should I buy more? Gosh, I love this company or this fund! No way is it going back down!"
When the stock or fund is down we start rationalizing: "It'll come back, I know it will!" or "I love their product. Why can't the rest of the world see this?" or ""The fund had a great year last year; it's just an off year, isn't it?"
Emotions play a bigger role than we realize. That's why we have to start here and get them under control. Here's how:
Step 1: Stop and freeze this moment in time
List all your stocks, bonds, mutual funds and any other financial assets you own. Regardless of their present price or profit-and-loss position, write down the one to three reasons why you initially bought each asset. Did you buy this mutual fund or stock because of its past track record? Did you buy it because a broker or adviser strongly recommended it? If that is the case, write down the specifics of that recommendation.
Step 2: Get your emotions in line with your priorities
At the top of the page, write this mantra: "These are investments, not my children or loved ones. Thou shalt not fall in love with a company (stock), mutual fund or any other financial asset. Period." !" Repeat this mantra over and over until you believe it and, more importantly, feel it!
Step 3: Analyze your investments with a cold heart
Now that we have established a cold, calculating analytical mind-frame, we can proceed to examine the important questions about our current investment portfolio:
- What are the specific reasons for me to hold this asset today and going forward?
- If I did not own it today, would I be a buyer of this asset, and enthusiastically so?
- Do I truly have enough information and data to feel comfortable owning this investment?
- Am I confident in the sources of information and data regarding this investment?
- Has there been consistency of success from the broker/adviser who recommended this investment?
I can see clearly now
Once you complete these steps, more often than not clarity will begin to take hold.
"Yes, I love the prices, convenience and choices at my local Wal-Mart store, but do I want to own the stock today and going forward?"
"I have finally mastered and appreciate Microsoft's Office Suite, but do I want to own a piece of this company?"
"Wow, that mutual fund has a big-name firm in its title, but what do I know about the senior fund manager making the investment decisions?"
Eliminating your emotions is the start to a happy, balanced and successful investment life. I ought to know, as I was once so emotionally involved with a company that it cost me $2.5 million in paper profits. In late 1999 early 2000, I put $200,000 into VeriSign Corp. The company, and therefore the stock, soared over the next 12 to 18 months and my investment was worth $2.5 million. "Sell! No way, it is going to $5 million!" I said.
Timberrrrr ... . The stock systematically fell over the ensuing 24 months. I had plenty of chances to take my profit, all or most of it, and run. But, no, I had fallen in love with the company, its management team and its prospects. My investment at the bottom was worth $43,000. Here I was an adviser to portfolio managers that run billions of dollars and I fell right into the emotions trap. I knew full well that the most important principle of professional money management, "Thou shalt not fall in love with any stock," and I violated it.
Something to get excited about
You can also use emotions to your advantage - other people's emotions.
Case in point: In January 2004, I was watching a business news program and saw an interview with Steven Jobs, CEO of Apple Computer. Many on Wall Street had left Apple for dead as the Mac computer was selling into a very limited market of students and "artistic" engineers. But Jobs was excited about a new Apple product he believed was going to change the way people listened to recorded music -- something called an iPod.
What intrigued me was his passion and fierce sense of conviction about the product. He wore his emotions on his sleeve. I felt that anyone who believed that strongly in his company's prospects deserved to be taken seriously.
I did some digging into this iPod phenomenon and bought shares of Apple at $14 to $15. My portfolio manager clients were not convinced that the iPod was for real; they thought the iPod would fizzle as "just another fad."
They were wrong. Customers quickly developed a sense of loyalty to the iPod and began purchasing songs from the iTunes store. Now, of course, "everyone" is on board and Apple Computer stock has been one of the most successful stocks of the last three years. Shares are currently at $90. I am still holding onto my shares as the iPod will begin to offer other convenient services such as wireless downloading and an iPod cell phone.
Conclusion
I learned a painful lesson from my VeriSign experience: Don't let your emotions influence your investment choices.
You need to re-examine every financial asset you own with a fresh set of eyes and a cold heart. But also be aware of other people's emotions - investors who ignore a stock without even investigating its potential as well as CEOs who are passionate about their company's future. Both can be opportunities for you to profit.
Understanding and controlling emotions is your first step if you want to stop losing money today!
Also by Georges Yared:
Stop Losing Money Step 2: The most important factor in choosing a stock
