How To Lose Money
Updated: Jul 3, 2020
So, this week has been another interesting week with the market moving swinging up and down like a roller coaster. The US Federal Reserve attempted to dampen the volatility by reducing the federal funds interest rates from 1.5% to 1%. That plan failed to improve confidence in the market as many saw it as a desperate move from the Federal Reserve. Overall, this week failed to bring any additional confidence to the market which is why I feel that the markets will fall even further, and I intend to stay out until it stabilises.
This week’s theme is “How to Lose Money” and I think it is important to understand when you actually lose money versus when your portfolio value drops temporarily due to market volatility. It is essential to always have a clear view of this difference because seeing your portfolio in the red and not doing anything about it is a difficult task.
In my opinion, when it comes to investing and the stock market there are 2 ways of losing money.
1) Investing in an asset or a company that will eventually go to 0. An example of such a company is Helios and Matheson Analytics (HMNY). In August 2017, Helios and Matheson acquired MoviePass which drove its price up from $800 to a high of $5,000. While this might have seemed like a good acquisition at that time, Movie Pass eventually went bankrupt and brought the value of HMNY all the way down to $0 where it can never recover from again. There is no way of ever recovering an investment once a company has gone bankrupt because it does not exist anymore.
2) The next way to guarantee a permanent loss of investment is selling when you are in the red. Because once you sell out, you lose out on any future gains the company makes and will need to buy in again. If we look at the trend of the Dow Jones Industrial Average (DJIA) for the last 100 years, we can see it always trends up given a long enough time frame. In fact, the longest time period where the DJIA trended downwards was from 1966 to 1982, a period of 16 years. So, my point is that the market will recover eventually, and if you sell your investments at a loss, you miss out on that recovery.
Having discussed how to guarantee a loss, we now take a look at my portfolio this week. I have sold out on Tesla (TSLA) and Innovative Industrial Properties (IIPR) while I was still at a profitable level.. I think the market will drop even further and I intend to buy back into both stocks.
The worst hit this week was Bank of America (BAC) which has fallen about 20% in value for me. I have a considerable portion of my portfolio in BAC and I am certainly concerned if it will drop further. I do not want to act too quickly because as we have seen this week, the market can be very volatile, and I do not want to lock in a permanent loss on BAC. I am researching more on BAC right now and trying to understand how badly they will be hit once the recession starts. Normally the financial institutions are the worst hit during a recession, but I have been reading up on the Repo Market and there are whispers that there is another financial disaster around the corner so I want to better understand that situation.
The other stock which has been really bad for me and in hindsight I should not have bought is Exact Sciences (EXAS). In a market where Pharma stocks are flying, EXAS has been the sole poor performer and unfortunately, I own it. I will wait another week and see how it goes with EXAS and I might have to take a loss on this stock, not because I think the company will go to 0, but because I think this one will take a long time to recover and I believe that I can direct that money elsewhere and recover the losses quicker. So, normally I don’t believe in selling stocks when they are in the red, but I will need to take my losses on EXAS which has been disappointing.
In my Portfolio chart, I will be splitting up the Profits taken and dividends from the value of the stocks. This is because now that we are in the bull market, I should accurately reflect the value of the portfolio so that the profits that I have taken do not mask the portfolio value. From a net value point of view, I have actually broken even as the profits taken from TSLA and IIPR and my dividends cover the drop in value of the portfolio.
Looking purely at portfolio value, it is evident that the market has moved like a roller coaster this week by the crazy jumps in value in my portfolio.
From a dividends point of view, I continue receiving dividends. I have not increased my positions in my dividend stocks so the dividend values are not going to trend upward anytime soon. But I am on the lookout for good value dividend stocks as the market falls.
I have also been doing some short-term trading of Pharma stocks because the C-19 situation given some volatility to that industry. The short-term trades have been also giving me some small profits which I will keep adding to my portfolio. However, it must be noted that due to the volatility of these Pharma stocks, this trading is very risky and the funds I use for this short-term trading is really small. I do this because I have no issues losing that amount.
Hoping next week is a good week for BAC, EXAS and dividend stocks so I get a buying/selling opportunity.
Disclaimer: This post should not be interpreted as investment advice as I am not a professional financial consultant. The objective of this blog is to share my experiences with others and receive feedback. I will provide links to my information sources to the best of my abilities, but the reader is responsible for their own due diligence