The dangers involved when falling in love with a stock…

avatar By: IS
Date posted: 05.25.2010 (4:36 am) | Write a Comment  (15 Comments)

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I guess it happens to everyone at some point doesn’t it? Anyone who is active in the financial markets runs the risk of falling for a stock. Imagine walking into a bar and seeing that stunning blond girl. You might also meet her through a friend, neighbor or even a random encounter. You know what they say, “Love is Blind“. That is certainly great and to a certain extent, something we all hope to live at one point in our life. But I would bet each one of us knows at least one person in an unhealthy relationship. There are many many reasons for a relationship to be unhealthy other than the obvious physical & verbal abuse. Sometimes, we are with someone who does not make us happy (isn’t that the end goal?) but yet, we are so blind that we cannot look at the situation with any objectivity.

The same can happen in the markets. At some point, we read about a certain company, or hear about it from a friend, neighbor or even hear someone mentioning it. At this point, there is that danger, you might be falling for that company or it might even be love at first sight. It can become unhealthy financially and can have very adverse consequences and even lead to a poor retirement in extreme cases.

Symptoms

Think you might have fallen for a stock? Here is a quick checklist to know if you have fallen in love for a company/stock, which we will name XXX:

1-Each time you read about XXX, do you only look for the positive aspects?
2-Do you look for positive news when XXX releases financial results?
3-Do you keep buying XXX when its price declines because “you know” it will rise back up?
4-Do you try convincing your family and friends that XXX is the right one and that they should give it a fair chance?
5-Can you imagine yourself getting out of the relationship (selling the stock) if it went up 20-30%? Or are you certain that it will be a lifelong relationship?
6-Do you feel emotionally attached to XXX?
7-Do you still hang on to those good old moments when the stock made you a few dollars and gave you ideas of breaking the bank?
8-Do you have trouble admitting that getting involved with XXX might have been a mistake from the start?
9-Is XXX maybe more of a one night stand that you need to get in and out very quickly instead of holding on to (I’m not referencing anything more here… hahaha)

Google

The reason I wrote this post is because I fear this has happened to me. You see, I included Google (GOOG) in my 4 stock picks for 2010 and have also picked the company in 2 trades this year. They have all gone very very bad. I continue to see and even write about all of the impressive business aspects of Google and how it will have such an important impact on the economy. That might be true but how many times will I pick Google before coming to the sad conclusion that maybe my relationship with Google is not healthy and that I should move on? I’m not saying I’m there yet, but it’s approaching that point… I think that as difficult as it can become, it is important to take a break at some point. In the financial world that means selling your position. When you no longer own the stock, it is a lot easier to get a more objective view of its value… Right now, I have no positions on Google (other than the 4 picks for 2010, which I cannot change anyway) and so it is easier for me to see Google as any other company rather than the one that makes me feel so good:)

Consequences

-If you stay in an unhealthy relationship, you might have trouble committing yourself in the future when the right one comes along
-You might suffer many more losses than what you can sustain financially and emotionally. The losses over a lifetime of investing can be incredibly high
-You will have trouble having faith in your future relationships

What to do

The first step, as you have maybe guessed, is to admit to the problem. Personally, I am aware that it might be a problem although I’m not convinced just yet. So here you go, the steps involved:

-Admit to the problem (falling in love with xxxx)
-Look at all the of the symptoms and impacts on your life
-Imagine yourself in 10 or 20 years, ruined by this company, imagine what your life would look like if you put everything into XXX and it failed…
-Distance yourself, for some time. Cut all contact and take the time to rethink what XXX is truly worth
-If after a good break you think that XXX is truly the right one for you, go back to XXX but with a clear plan and exit strategy if things turn sour once again

And you, have you ever fallen in love with a stock?

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15 Comments

  1. Comment by PA — May 25, 2010 @ 11:30 pm
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    Hope you remember my comment on your stock picks for 2010 post.

    While I am wrong way more often than not, I think I got atleast this one right. GOOG has underperformed the way very few people thought it would.

    It’s a different matter how it would perform the second half of the year though. I think the stock might be a relatively low-risk long term holding, perhaps.

  2. Comment by Zavi — May 26, 2010 @ 6:33 am
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    Great post, but I will stay awhile and be faithful hehehe I am totally in love with Google ;) It’s buy and hold strategy for me. Although the stock has not performed the past few months, I remain confident that it will eventually rebounce… (then don’t worry for your stock pick)

  3. Comment by Frank — May 26, 2010 @ 7:11 am
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    ohhhh USO was a total disaster for me. I bought this ETF at its peak in 2008 in my margin account. I thought that this ETF would reflect the price of oil. It is, but the process of rolling its position was lagging its tracking because of the phenomenon of contango. I was persistent and like you said “in love with USO”. I met the calls by adding more and more money. Arggghhh until… I’ve decided finally to sell my positions! I’ve lost some money and I’m still bitter “about my ex”!! Great pics man.

  4. Comment by IS — May 26, 2010 @ 10:15 am
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    @PA – Yes I unfortunately remember your comment very well:) And yes, I agree, at this point, the risk in holding Google is fairly low. That is why I will probably give it another shot soon. It was almost my pick against Blue Nile this week..! So would you actually buy Google at this point?

    @Zavi – I can understand 100%$ yes. But at what point would you get out? If you can’t answer, maybe there’s a problem….:)

    @Frank – Wow, at least you got out..hopefully you did not lose everything on USO?

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