Will Your Stock Be Gone in 18 Months?
May 31, 2013I have always enjoyed reading about predictions. It happens a lot at the end of one year and the beginning of another. I usually print a few of them out, put them in a folder, forget about them for a long time and then look at them a year or so later as I’m printing out a new set. One of the articles from last year turned out to be relatively accurate. When I read this article, it took me back to last year’s article and the writers have a methodology that I’m sure will keep me reading their predictions each year.
One of the things that I did when reading last year’s predictions was wonder if any of the companies that they predicted would be gone in 18 months were sitting in my investment accounts. Fortunately for me, I owned none of the stocks from last year’s article. But there are some old holdings in my account that I had almost forgotten about.
(I will admit that after talking to people about their financial lives all day long, I don’t always have the desire to look at my own when I get home. I am actually hiring a financial planner to help me review my financial life. Since he/she won’t be as close to the day to day activity they will have an unbiased approach and help me make some changes that are probably long overdue.)
There are some stocks I bought long ago that have not really produced any significant return, but they haven’t produced losses either. I’m thinking it’s time to do a re-evaluation of everything I own to see if it still makes sense to keep as a part of my financial life. This article prompted me to take some action.
What can you do? If you buy individual stocks, keep an eye on them to make sure that the company is still viable and profitable. I’ve talked to so many people who love to buy stocks and hold them for a long time. In that time, the fundamentals of the company’s business can change dramatically.
If I tried to sell you stock in a company that mass produces typewriters today, do you think you’d buy it? How about a company that makes 8-track tapes? (Everyone under 40 years old is asking “what’s an 8-track tape?”)
Businesses have a life cycle and just because a company is a market leader today, it doesn’t mean that it will always be a market leader. 5-10 years ago everyone I worked with was so addicted to their Blackberry. Last Friday night, a bunch of my old work friends got together and not one of them still owns a Blackberry. Most are iPhone users and a few of the more tech savvy guys have moved away from the iPhone to a Samsung Galaxy. Blackberry owned the market just a few years ago and today….not so much!
If you had their stock 10 years ago, I hope that you stayed on top of the trends in that business and exited at a profit. Just because you loved a company when you bought their stock doesn’t mean that they’re going to run a great business forever. The old expression “date your stocks, don’t marry them” is one to live by.
When you hear bad news about a company, check out if it’ll have an impact on your portfolio. Think through the investments you already own. Why did you buy them? Are those reasons still valid? If not, maybe it’s time to put an exit strategy in place for that investment. Even if they are still a leader in their business, it makes sense to have an exit strategy.
One of the things I’ve gotten away from but used to have as an active part of my investment philosophy is having an exit strategy in place before I even bought a stock. If I were buying a stock at $20/share, I knew my exit points on the upside and on the downside. Using that $20/share example, I might buy the stock and immediate place sell orders at $15-16(to limit my downside losses) and $25-$30 (to capture a healthy profit). I’m not advocating that anyone use that particular model, but have some kind of guidelines for exiting a stock before you even buy that stock. Otherwise, you can end up with a mess that you’ll have to clean up years later.
The bottom line, the message that I’d like you to walk away with, is that investing in individual stocks is an activity. Don’t use the ostrich model of putting your head in the sand, buying a stock and never following up. Participate in your investing; don’t just watch from a distance. Long term, actively engaging in the process will be a lot more fulfilling, psychologically and financially.