By Brian Richards and Tim Hanson February 20, 2009 Comments (74)
I can be just as dumb as anybody else. -- Peter Lynch, September 2008
Peter Lynch earned near-30% annual returns running Fidelity Magellan from 1977 to 1990. He's sold millions of books, raised millions for charity, and holds the rare distinction of having a Motley Fool Global HQ conference room named after him.
But in September 2008, Peter Lynch also had the ignominious honor of holding both AIG (NYSE: AIG) and Fannie Mae (NYSE: FNM) in his personal portfolio -- as they dropped 82% and 76%, respectively, during that month alone.
For those of us who have spent our investing careers trying to match the great Peter Lynch … well, if you lost 80% in September, then congratulations -- you did it! If you did better than negative 80%, then you beat the great Peter Lynch.
Invest like Peter Lynch We kid, of course, and we're in no way demeaning Lynch or his illustrious career. Rather, we're just pointing out how hard it's been to avoid a flameout lately. When the blue-chip S&P 500 has dropped some 40% over the course of a year, you know it's bad.
And when companies like Boeing (NYSE: BA) and Adobe Systems (Nasdaq: ADBE) drop more than 50% in the course of a year -- even though they're historically strong operators that appear to have little to do with the crisis on Wall Street -- you know it's rough out there for pretty much everyone.
In other words, even if you don't own AIG or Fannie, you probably own a stock like AIG or Fannie. We sure do. Brian, for example, has ridden Whole Foods Market (Nasdaq: WFMI) from $40 to $12, while Tim has watched pump-maker Colfax sink from $20 on down to $10. Ahem.
We are not aloneAnd while there are many stocks that will recover from this market downturn, it's likely we're all continuing to hold stocks that won't. New research, from Professors Nicholas Barberis and Wei Xiong of Yale and Princeton Universities, gives a name for this tendency. We're exhibiting "realization utility."
Realization utility encourages investors to hang on to stocks that have sunk -- even when those stocks have dim futures. Here's how they explain it:
The authors consider an additional experimental condition in which the experimenter liquidates subjects' holdings and then tells them that they are free to reinvest the proceeds in any way they like. If subjects were holding on to their losing stocks because they thought that these stocks would rebound, we would expect them to re-establish their positions in these losing stocks. In fact, subjects do not re-establish these positions.
That's right. If we force-sold all of your stocks and gave you the cash to reinvest, would you buy the stocks we had just sold? Odds are, you wouldn't.
So, why would you hold on to stocks that you don't think will recover? We'll let the good professors give it to you straight:
Subjects were refusing to sell their losers simply because it would have been painful to do so … subjects were relieved when the experimenter intervened and did it for them.
Wait a second
But aren't we the guys who pounded the table two years ago about how individual investors like us sell winners too early, missing out on life-changing multibagger gains to lock in a modest return? "Quick trigger fingers aren't rewarded," we wrote at the time.
And that's still true. But down markets like this one present an enormous long-term opportunity for investors … only so long as you're willing to do some selling.
See, when stocks are expensive, we may invest in mediocre stocks because they look cheap, while passing on superior operators because they're too expensive. Today, however, those superior operators are all down double digits at least.
Google (Nasdaq: GOOG), for example, dropped more than 50% in 2008. Dream stock Microsoft (Nasdaq: MSFT) -- given its growth, FCF-generating abilities, competitive advantages, and bulletproof balance sheet -- has a P/E in the single digits!
In other words, now is the time to upgrade your portfolio.
Why you should sell
You should always sell when you have a better place to put your money -- and today, a host of superior companies are on sale. The takeaway, then, is to recognize when realization utility may take root, take a sober view of your holdings, and take advantage of this down market to upgrade your portfolio. Ten years from now, you'll be very glad you did.
We're both looking to take advantage of current prices in foreign markets -- which have been hammered even worse than our own S&P 500.
Brian Richards owns shares of Microsoft and Whole Foods Market (still). Global Gains co-advisor Tim Hanson owns Colfax. Microsoft is a Motley Fool Inside Value recommendation. Google is a Rule Breakers selection. Whole Foods is a Stock Advisor pick. The Motley Fool has a disclosure policy.
Read/Post Comments (74)
Some interesting comments:
On February 20, 2009, at 11:03 AM, DargFool wrote:
I love the statement, "You should always sell when you have a better place to put your money".
I give that a capital DUH. The problem is identifying when one place is better than another. Presumably the losing positions you are holding were "better places to put your money" at the time you bought them.
The buy and hold investors basically say, hey, we have no chance of identifying which investments will do better than the other, so we will get our returns by trading infrequently.
The value investors say, We only buy quality cheap, and we think we can differentiate between cheap quality and cheap crap.
The growth investors say, We can't tell what it's worth, but if it is moving in the right direction, then by a fallible application of Newton's law, a stock price in motion tends to stay in motion.
The financial planners say, everything is a gamble so you have to a million small bets instead of a few large bets. And by the way, here is your bill.
The traders and talking heads say, Buy my computer trading system, its models have been tested in all market conditions, and it generates returns of 23% (your results may vary).
The hedgers say, I don't know which way its going to move, but if it moves a lot I win.
The average investor says, "Damn, screwed again. I paid that CEO 10 million to LEAVE the company after I got a 90% loss. Great job Board of Directors, you are really on top of things!". I am taking what's left of my money and buying a beer. At least I can enjoy that.
Report this Comment On February 20, 2009, at 6:04 PM, Redbird95 wrote: Great but even "safe" stocks continue to drop. I can see the sell but buy now? I thought GE was a great bargin at $15 (down from $35) now it is $9 (another 40% down) with a yield of 13% but will it go to $6? Sometimes ridding a new purchase down is worse than seeing the old ones sink.
On February 21, 2009, at 12:13 AM, TradeNakedOption wrote: The high dividends on quality companies like GE look great. But if you get 10% and the stock drops 20%, you are not doing your account any good.
My bias is to be neither short nor long the market. I talk more about this with options on my blog:
Report this Comment On February 21, 2009, at 12:39 AM, truthisntstupid wrote: No thanks. One of my picks did get crushed but I liked it then and I'll like it again. Be stupid to sell it because its down then decide ten years from now that I like it again and buy in again higher - now wouldn't it? It's still the same company, still has a wide moat, still an iconic brand - and long-term prospects are no worse now than they were when i picked it. If more people thought for the truly long term when they buy (buy and KEEP) they would find that it forces you to think a lot differently and put a lot more time and consideration into choosing companies they would have unshakeable confidence in even when something like this happens.
Report this Comment On February 22, 2009, at 11:14 AM, truthisntstupid wrote: Samscreek
some of these people don't seem to realize what long term is. I buy with no plans on ever selling and it forces me not to try to capitalize on short-term movements. To me it's the difference between gambling & investing.
Report this Comment On February 22, 2009, at 11:35 AM, ReillyDiefenbach wrote: Investing in stocks is ALWAYS a gamble.
Report this Comment On February 22, 2009, at 12:01 PM, truthisntstupid wrote: True. But is my investing for dividends in companies like P&G and PEP and various utilities gambling to the same extent as people trying to capitalize on short-term price movements? I read the "Intelligent Investor" and like the mental perspective of taking the view that I'm buying "a piece of a business" instead of a number whose volatility might give me a profit. Love Ben Graham for the mental aspect of what that book teaches yet I'm not really a "value investor."
I'm more of a dividend investor that believes in the ownership viewpoint that Ben Graham teaches
On February 23, 2009, at 2:19 PM, Ecomike wrote: I stayed out of the market for 20 years, got back in in October as I started to see stocks on sale. So far I have been up, down and even, right now about even, which means I am holding about twice as much stock as I had 4 months ago. I sold NCX today at 300% profit on an Arab (Dudais, UAE?) Take over, taking it private at a 300% premium over last weeks closing pricing. They are buying and we are selling. SIRI got a private (Non-gov) bail out last week, stock tripled in one day. Trick is buy stocks that get hammered huge.
I feel pretty good as I am even with my peak value from last year as of today, with the market at a new bottom.
Report this Comment On February 27, 2009, at 3:15 PM, kpmom wrote: See when I see things like this, I wonder why I ever subscribed to the Motley Fool publications, and am glad I canceled my subscriptions. Y'all rode your stocks down 40%, 50%, 60%, and MORE??? Why????
And you guys have the nerve to CHARGE for your "reccomendations"? This is the problem with the MF's "buy and hold" forever mentality. Do you realize how long it will take to make those losses up (if ever), never mind moving ahead? I follow IBD's reccomendation to cut all losses at 7-8%. And don't tell me about Buffett's buy and hold strategy. He's a zillionaire. Most of the rest of us are not. Shame on you all for not advising your follows to PRESERVE CAPITAL at all costs. For we workin' stiffs it's the name of the game
Report this Comment On February 27, 2009, at 3:56 PM, JoeyBallz wrote: Hey whiney guys that are bitching about losing their money on stock recommendations from Fool. Just because they each recommend a stock to buy each month doesn't mean that you should go out right then and there and buy it. There are dozens of underlying factors that you need to consider before just buying whatever a newsletter says (No, I'm not going to explain them to you, go read a book). If you've been buying every recommendation they've given you for the past year, you're going to be down 50% from where you started. That's what happens in a recession. The knife is still falling and will continue to until the nation regains confidence. If you try to catch a falling knife when it's got a heavy weight behind it, you're going to get cut... well your money is at least. If you think just because they recommend a stock that means you're going to make money on it right away or in the middle of a recession you're either retarded, a Hillbilly that never finished getting their GED or you just shouldn't be investing at all. These recommendations are mostly stocks to buy and HOLD so that once a bull market makes a comeback (who knows when that will be), these stocks will rebound better than most stocks out on the market (If you haven't checked, their recommendations are doing much better than the market itself). Don't blame Fool.com because you don't understand the basic concepts of investing. If stocks give you too much of a tummy ache and you're selling them once you've already lost 50% of your money try out some nice mutual funds or ETFs.
P.S. If you still want to go on and make blind thoughtless investments, please be my guest. You're only helping me build my own wealth. Happy trading! :-)
Report this Comment On February 27, 2009, at 4:48 PM, truthisntstupid wrote: I can't hope to say it better than joeybalz
most of you whiners had no business subscribing to a newsletter til you first invested that same money in a copy of "The Intelligent Investor", some good books on dividend investing, and maybe at least a first-year college textbook on accounting principles.
On February 27, 2009, at 4:49 PM, garyanton wrote: My own approach is to only invest in securities which yield substantial dividends or interest - i.e preferred shares, income trusts, MLPs, CEFs, bonds, etc. I avoid common shares because of what many people above have complained about - I have no idea where "the market" is heading. While portfolio values can still get crushed if companies fail to pay a dividend or go bankrupt (I held both Lehman Bros bonds and Freddie Mac preferred shares and incorrectly thought they were utterly solid), overwhelmingly companies continue to pay. Yields right now are often extraordinary and the steady, generally predictable cash flow sure beats the guesswork of timing the market.
Report this Comment On February 27, 2009, at 5:25 PM, biglittleone wrote: My first stock purchase was in 1952. Anyone have earlier first exposure to risks of markets?
I sold it before being drafted into the army in 53. Next purchase was after graduating from college in 1960. Still have some of the ofspring of this purchase.
Since then I have had many more gainers than losers.
I will probably buy some more in the next several weeks.
It helps to be debt free in a paid for house.
On February 27, 2009, at 5:41 PM, rwk2008 wrote: Most of us (including me) have tended to give stock pickers far more credit for clairvoyance than they deserve. TMF doesn't know how the market will behave, doesn't know which stocks have solid base and which are mostly hot air. TMF picks a few stocks they THINK might perform better than the market in the short to medium term (think a month or two to a couple of years). If the market drops 50% and their stock drops 45%, in some limited sense they were right. When everything was booming, and bubbles were expanding, it wasn't hard to be a hotshot stock picker. In today's market, it takes a lot more digging and long-term perspective to get it reasonably right most of the time. And you don't get that with a couple of guys pumping out lots of stock picks every week.
One thing to remember - unless you think the market is going a lot lower, don't be a net seller of stocks. If you expect a recovery in the next year or two, pick some stocks YOU expect to hold up and do well, and put some money into them. They probably won't be the ones that have almost completely collapsed (like CITI, BofA, Fannie and Freddi, and GM). They also may not be the ones that have dropped less than the rest. You have to consider the source and value of the advice, and make up your own mind. Remember Warren Buffet took a loss on Level 3, Bill Gross is surprized at the dept of the recession, and Peter Lynch had big bucks in AIG last year. And most of the multi-million per year investment bankers were betting on toxic real estate 'securities' up until last summer. Nobody gets it right more than about 2/3 of the time.
I see a lot of posters who want to bring the neo-con republican wing nuts back to run Washington. Hello! What part of ran the country into depression do you not get? If a republican tells you it is night, go to the window and check. They haven't been right for a long time, probably since Teddy Roosevelt left office. They've given us two major depressions in less than 100 years, and they still haven't given up on trying to kill social security, medicare, and the American labor movement, three of the progressive ideas that made our country great and built the middle class most of us are a part of.
On February 27, 2009, at 9:56 PM, InvestingShar wrote: It seems that there fewer and fewer real investors left in the world every day now. But there are so many gamblers!..Buy today hoping it's going to go up and sell tomorrow to get some return in case it'll go down.
These are shares of the company we are talking about here. We are owning part of the company!
A lot of speculations, a lot of misleading information, a lot useless articles, a lot of bad news out there right now.
But the true investor beleives in the concept of the stock market, the concept of trading, the concept of investing. The true investor buys value cheap. And this is the time, gentlmen! This is the time to get on the board, fasten your setbelts and enjoy the journey for the next 2-5 years. And once the world economy is telling you: It's going good. - you have to sell everything you've got and wait for the next time like NOW!