You Got To Know When to Hold 'em

“You got to know when to hold ’em, know when to fold ’em,”
The Gambler

Recently, Calculated Risk, an excellent financial blog that often focuses on Real Estate told the story of an accidental landlord. In a market rapidly heading South, he couldn’t sell his house at the price he wanted, so he decided to rent the house until the market recovered. Earlier this year, he put the house back on the market, at a substantially lower price. It didn’t work. Nobody wanted to pay that price. Once again he rented the property and hoped for a better day. Currently, he dropped the price again and put his home back on the market. It isn’t selling. The owner believes he will pull it back off the market and hope for a better day. Real Estate investors call the phenomenon, “chasing the market down.” It doesn’t work.

People do this because they fall in love with their homes, believing that the market must value such a wonderful property as much as the owner. They get a price stuck in their head, and continue holding on to that price even as the market tanks. I have seen this happen a couple of times in my neighborhood. Once, after several years of frustration, the owners finally sold at $100,000 less they wanted. The second example ended in a successful short sale, if a short sale can ever be considered successful.

People who buy and sell stocks can fall into the same trap. I have a pretty good idea when to buy a stock but sometimes I exhibit the tendency to hold on, hoping for a better day, when I should just take a tax loss and walk away. Sometimes there is more than a little ego involved. Sometimes I just fall in love with a stock. Neither ego nor love should ever be a factor in an investment decision. With General Electric, I bought the stock after it had dropped, at $34.79. General Electric was a dividend aristocrat. Under Neutron Jack Welch, GE developed the most ruthlessly efficient management this side of the Waffen SS. Ah the technology, I just loved their turbines, locomotives, and big box medical equipment.

What I didn’t realize was I did not own an industrial/technological conglomerate. I owned a finance company with many dubious loans and questionable customers. As GE continued to head down, I bought a little more at $28.75 and then a little more at $24.25. I was certain that given their AAA credit rating, superior management, and impregnable dividend things would get better. Things didn’t get any better. In fact GE lost their coveted AAA credit rating and management was forced to cut the dividend. The price tanked. Finally, I bought a little more at $12.49. Today GE sells for $15.39 and pays a 3.12% dividend. Clearly, my handling of this investment is the worst performance of my career.

For the record, today GE is rated B by Schwab, Outperform by Credit Suisse, Buy by Ned Davis, Hold by Argus, Four Stars by Standard and Poor’s, Outperform by Reuters, and Neutral by Market Edge. I continue to hold. I am also comforted that Warren Buffet, the genius, bought $3 billion worth of GE preferred near the bottom. I also must admit he got a much better deal than is available to the average investor.

I bought more shares in a number of companies during the great debacle of 2008-2009. In the other instances, it paid off. But there was a difference, I wasn’t in love with any of those stocks and I didn’t feel as though my ego was tied up in owning them. Earlier, I made the same mistake with a small holding of Corning. After watching the stock go up and down for several years, I finally grew disgusted, gave up, and sold my shares at a loss. I held on to Corning for longer than I should, because I was in love with their technology. I should have learned something about myself from that inexpensive lesson. Hopefully, I have finally learned my lesson.

From an article by Harry Domash, entitled, Nobel winner unearths 5 common investing mistakes; the author reports, “Daniel Kahneman, a psychology professor at Princeton University, won the Nobel Prize in economics for his attempts to explain the quirkiness that governs our financial decisions…. The truth is that investors don’t like to recognize a loss. I know I don’t. One strategy they use is to wait for a stock or a mutual fund to get back to even, reasoning that they haven’t lost anything. This shortsighted approach ignores the opportunity cost, or what else they might have done with their money in the meantime. And the reluctance to recognize losses affects professional managers as well as amateur investors, Kahneman says. Accepting a loss and moving on is very difficult.”

“Now ev’ry gambler knows that the secret to survivin’
Is knowin’ what to throw away and knowing what to keep.
’cause ev’ry hand’s a winner and ev’ry hand’s a loser,
And the best that you can hope for is to die in your sleep.”