Author Topic: What to do with crappy stocks?  (Read 6665 times)

morning owl

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What to do with crappy stocks?
« on: February 05, 2015, 10:00:04 AM »
hi you wise Mustachians,

I have a question about my DH's investments. We are on slightly different paths with our investment strategies -- he has had a history of investing in penny stock type deals, where he gets a tip from a colleague and has made some risky purchases (mainly in Canadian exploration stocks. Yes, you can see where this is going.) My own style of investing is to invest in low-dividend-paying blue chip Cdn and US companies, looking to buy them when they dip. In the past few years these have done very well.

My question is -- what do we do with these stocks that have lost a lot of value over the years? He bought them when commodities were at a high. Now they're at a low. The common wisdom is to NOT sell at a low point. But these stocks are currently weighing down his portfolio. I see them as a drain -- it might take years for commodities to bounce back, and who knows if these companies can withstand the wait. These investments make up roughly 20% of his portfolio. We are saving aggressively now, so this percentage will get significantly lower in the next few years if the stock prices remain the same, but I'm just not sure what to do. He might not be willing to sell, but I have yet to come up with a convincing argument. We hope that he can retire in ~5 years. I am favouring the more secure dividend-paying route and just see these investments as a waste of potential income.

Any ideas or thoughts on this?

thd7t

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Re: What to do with crappy stocks?
« Reply #1 on: February 05, 2015, 10:09:47 AM »
Sell them.  You're in a sunk cost fallacy situation. 

seattlecyclone

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Re: What to do with crappy stocks?
« Reply #2 on: February 05, 2015, 10:17:08 AM »
Do you have any reason to believe these stocks will increase in value faster than whatever else you might invest the money in? If not, sell and buy a more reasonable investment.

GreenPen

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Re: What to do with crappy stocks?
« Reply #3 on: February 05, 2015, 10:35:16 AM »
I can't offer any advice on how to time the market. But if you want to convince your husband to sell, you could pitch it as tax loss harvesting.

neil

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Re: What to do with crappy stocks?
« Reply #4 on: February 05, 2015, 10:42:54 AM »
The common wisdom is to NOT sell at a low point.

The correct wisdom is to sell positions that no longer fit your investment criteria.  I don't see any point in judging whether or not you should have done it before but whether you should do it now.  Your cost basis has nothing to do with investment decisions beyond the fact that human beings are affected by it.  Choose not to be, and you'll be better off.

(I suppose the best thing is to have excellent investment criteria... but failing that, I don't see the point in keeping with a strategy you are not comfortable with anymore.)

Mississippi Mudstache

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Re: What to do with crappy stocks?
« Reply #5 on: February 05, 2015, 10:44:00 AM »
He bought them when commodities were at a high. Now they're at a low. The common wisdom is to NOT sell at a low point.

That isn't wisdom, that is the sunk cost fallacy. Base your present decision on future expectations, not past decisions.

He might not be willing to sell, but I have yet to come up with a convincing argument.

The convincing argument is tax-loss harvesting.

I am favouring the more secure dividend-paying route and just see these investments as a waste of potential income.

I think you can expect to get decent results from a dividend stock strategy, but I'm going to go ahead and throw in an obligatory recommendation for index investing a la John Bogle.

morning owl

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Re: What to do with crappy stocks?
« Reply #6 on: February 05, 2015, 01:04:23 PM »
Thanks for the input, everyone.

As far as I understand it, his reasoning for holding isn't so much about sunk costs, but the fact that commodity prices are cyclical and he feels these stocks will one day go back up. So in his case, I think he is basing the decision on future expectations... And maybe I just don't agree with those expectations.

I'm trying to keep on track with one method of investing. I've looked into index investing, which I know is favoured here on the forum, but I do best when I find something that I can stick with and stay interested in. For me, that's dividend growth investment.

Investment is a personal thing... You have to do what you're comfortable with. But at the same time, as a couple, it makes no sense for one person to be in super risky stocks while the other is in slow-growing blue chips. I feel like there needs to be more consistency between what we're doing with our investments. I am basically looking for a way to convince him to sell, but first I think I need to fully understand why he's holding them.

I'll suggest the tax loss harvesting, having consistency in our strategy, and not being afraid of sunk costs. We'll see how it goes!

skyrefuge

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Re: What to do with crappy stocks?
« Reply #7 on: February 05, 2015, 01:28:25 PM »
We are on slightly different paths with our investment strategies

This seems like the key issue that you actually have and need to resolve (of which one valid resolution is "accept that the two of you invest differently"). I'd say the good news is that you probably aren't all that different, since you're both stock-pickers. The bad news is that in the long-run, there's no real evidence that you're likely to be a superior stock-picker than he is. Sure, you might be winning this round, but if he stuck with his strategy, eventually there will be a round where he's winning. And then he'll be posting here "What do do with crappy stocks? My DW won't get rid of her shitty blue-chips that have stuck in the doldrums for the past 3 years!" It's kinda like an alcoholic trying to convince someone to kick their destructive coke habit.

I guess since you are both stock-pickers, you could consider each of you to be "fund managers" of different sections of your asset allocation. He can handle the "risk" side while you handle the "conservative" side. After all, even those of us who follow simple index investing have segments of our portfolio that are run with opposing philosophies.

morning owl

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Re: What to do with crappy stocks?
« Reply #8 on: February 05, 2015, 02:58:11 PM »
Skyrefuge, I see what you're saying, but it's not quite fair to paint all stock pickers with the same brush. For DG investors there are pretty clear goals, and it's quite the opposite of buying penny stocks, which to me is like gambling. I doubt there will come a day when DH will be saying damn, why did she buy so much JNJ? And with my DG strategy, if JNJ is ever going down the tubes, you better believe I'll be buying more! Whereas because his choices are quite risky, even he has been unwilling to buy them low. If he truly believed in these stocks abilities to bounce back, he would be buying more of them right now. (Hm, there's another good argument for getting him to sell... Hehe.)

My idea that would be better off being on the same page is that I feel that the two approaches sort of cancel each other out. A more extreme version would be one partner all in penny stocks while the other is in GICs. This type of investment partnership is in no way balanced, even though the two are doing different things. I think the goal for every couple in a long term relationship is to look at their portfolios as a whole and make sure that they balance out when seen altogether.

Retired To Win

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Re: What to do with crappy stocks?
« Reply #9 on: February 05, 2015, 04:53:18 PM »
The question I'd like to ask is whether the sale of these losers would generate a worthwhile amount of "recycled" cash to invest in something else.  If the losers are 20% of his portfolio's market value, that is one thing.  But if the losers are 20% of his portfolio's book value, the cash from selling them might not make a huge difference to your overall investment plan.  (And there's always that hope that the commodities cycle will turn and the losers will become less so.)

Le Barbu

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Re: What to do with crappy stocks?
« Reply #10 on: February 05, 2015, 05:26:36 PM »
As a Canadian, I would go for a plain 30%VCN, 45%VTI and 25%VXUS and bet over 10 years you will be ahead of both your actual portfolio

Full disclosure, I am actualy 30%ZCN, 25%VTI, 20%VBR and 25%VXUS

diversification, low cost and simplicity rocks! Do it in a tax efficient way, you cannot control returns

morning owl

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Re: What to do with crappy stocks?
« Reply #11 on: February 05, 2015, 09:42:59 PM »
Le Barbu, I consider my portfolio extremely low cost (less than .01%/year), diversified, and simple, yet I'm not going the index fund route. I've found a method that I like, understand, can stick to, and that works for me. So that's not really the issue. DH is now on board with this DGI strategy too, but he's got these leftover stocks from past mistakes.

RTW, it's 20% (roughly) market value of his portfolio. So it's fairly significant at the moment, but like I said, it'll decrease quickly as he's gaining momentum in his other investments.
« Last Edit: February 05, 2015, 09:44:30 PM by morning owl »

Le Barbu

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Re: What to do with crappy stocks?
« Reply #12 on: February 06, 2015, 04:56:27 AM »
Morning Owl, it´s fine if you dont want to index. I read your OP again and wondering if DH 20% is Ju
low because it´s PM related stock or it´s PM related CRAPPY stock? If it´s the first, I may wait because they likely will rebound someday, if it´s the latter, I would ditch and MAY buy a PM métal ETF. This way, he avoid risk related to individual co. but stay with about same A.A.

If he own this because of it´s gambling (or Gold Diggers) tendencies, should let him free to "play" with a % of his portfolio, 20% is not that bad...

morning owl

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Re: What to do with crappy stocks?
« Reply #13 on: February 06, 2015, 05:15:29 AM »
Well, I guess "crappy" is in the eye of the beholder... I had a talk with him again and he's absolutely unwilling to sell them. It's a bunch of gold exploration stocks, and he says this is just the wrong time to sell these. Also that since I have zero gold in my portfolio, this is good for diversification when you look at the big picture. He says we don't need to have the same exact strategy, as long as overall the portfolios are diverse and balanced. He's never done index investing, and I would probably do the ETF route in that allocation myself, but it's moot now since he's not willing to sell.

Le Barbu, you're totally right about the "play" money. That's a great way to think about it. He says from now on he's investing in the DGI "safer" stocks, so I guess this will be his play money. As long as it's not stressing him out, and he's comfrtable holding it, I have to let it go. Oh well :)

Le Barbu

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Re: What to do with crappy stocks?
« Reply #14 on: February 06, 2015, 05:35:09 AM »
And as I say now when SHTF, we are Mustachians, we can handle it better than "normal" people, we'll be just fine!

Cheers

morning owl

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Re: What to do with crappy stocks?
« Reply #15 on: February 06, 2015, 05:51:31 AM »
So true, Le Barbu! I am not too worried. Thanks for your suggestions!

RichMoose

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Re: What to do with crappy stocks?
« Reply #16 on: February 06, 2015, 07:57:31 AM »
Well, I guess "crappy" is in the eye of the beholder... I had a talk with him again and he's absolutely unwilling to sell them. It's a bunch of gold exploration stocks, and he says this is just the wrong time to sell these. Also that since I have zero gold in my portfolio, this is good for diversification when you look at the big picture. He says we don't need to have the same exact strategy, as long as overall the portfolios are diverse and balanced. He's never done index investing, and I would probably do the ETF route in that allocation myself, but it's moot now since he's not willing to sell.

Le Barbu, you're totally right about the "play" money. That's a great way to think about it. He says from now on he's investing in the DGI "safer" stocks, so I guess this will be his play money. As long as it's not stressing him out, and he's comfrtable holding it, I have to let it go. Oh well :)

I think the real issue here is that he's playing in exploration stocks, many of which probably don't generate any income and where his book value per share is constantly getting diluted by new share offerings and high cost debt issues. That is an almost guaranteed recipe for disaster because even the fundamentals are out of wack. Is there a chance you can convince him to sell these small stocks and invest in some larger, better managed companies like Kinross Gold or Yamana Gold? I'm just using K.TO and YRI.TO as examples, but when gold prices swing up they are likely to significantly benefit because of cash flow, smart management, and the fact they are experienced and low cost producers ($850 - $950/oz).
« Last Edit: February 06, 2015, 07:59:28 AM by Tuxedo »

morning owl

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Re: What to do with crappy stocks?
« Reply #17 on: February 06, 2015, 08:57:52 AM »
Quote
I think the real issue here is that he's playing in exploration stocks, many of which probably don't generate any income and where his book value per share is constantly getting diluted by new share offerings and high cost debt issues.

The companies he's in DO have cash value. He says most of them are trading at below their cash value right now, which is why he's holding on to them.

Anyway, hopefully this part will be down to a smaller percentage of his portfolio soon, and we can either look back on it in 10 years as a blip in the plan with a small chunk of money lost, or we can look back and he can say "I told you so."

Either way, I'm OK with it now.

innerscorecard

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Re: What to do with crappy stocks?
« Reply #18 on: February 07, 2015, 07:50:39 PM »
I would make sure you sell these at a time when you can harvest their capital losses for tax purposes.

innerscorecard

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Re: What to do with crappy stocks?
« Reply #19 on: February 07, 2015, 07:52:51 PM »
The companies he's in DO have cash value. He says most of them are trading at below their cash value right now, which is why he's holding on to them.

These are stocks of companies actually trading below their immediate liquidation value (cash value)? (i.e. net current assets - total liabilities)

phillyvalue

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Re: What to do with crappy stocks?
« Reply #20 on: February 07, 2015, 08:23:55 PM »
I differ from the common wisdom of the board and am not an indexer, and I believe the evidence supports that the market is inefficient, but from the sound of it your husband is a speculator or gambler and not an investor. If he is handling any more than a small portion of your net worth, I'd be very concerned.

Most of the great investors throughout history and existing today have been value investors. I think the best book to read on this subject is Seth Klarman's book Margin of Safety - here is a discussion and a link to the book (it's out of print): http://theconservativeincomeinvestor.com/2013/08/07/seth-klarmans-margin-of-safety-the-most-legendary-book-in-personal-finance/

I'd highly encourage anyone investing in individual stocks to read the book. The very first point made is the difference between investment and speculation. Speculation is buying something because you think someone else will pay more for it tomorrow. Investing is buying a stock because it is a piece of a business that you expect to produce cash flows that will more than compensate you for the price you are paying. Margin of Safety, the title of the book, is the concept that since future cash flows are inherently uncertain, you should only buy a business at a substantial discount to what you believe its value to be, giving yourself a margin for error in your calculations.

Non-productive commodities like gold are the definition of speculative assets. Even if gold falls 50% from the price it is trading at today, you could not buy it with a margin of safety because there is no way to calculate the value of gold - it doesn't produce any cash, it just sits there and looks shiny.

Value investing is all about buying out-of-favor businesses and assets, but only when those businesses and assets are out of favor for bad reasons. Sometimes stocks fall X% on news of a bad event that reduces the value of the business by .5X%; sometimes, the bad event actually reduced the value of the business by X% or more, and buying at that price doesn't indicate you are getting any better value today than yesterday.

On the subject of buying companies below the value of their net current assets, while this can in theory be a great idea (Buffett made a killing buying so-called "net-nets" when he was running his partnership in the 1950s and 1960s), in today's world there is generally a reason why these companies are trading at such levels. It's too easy to run a screen to find these ideas for many good ones to exist. In reality, there can be many pitfalls with buying these companies - for example, there may be liabilities that are off balance sheet or underestimated (for a retailer, think operating leases which you won't find anywhere on the balance sheet but are contracts that can't be killed off at will; for a miner, think of potential environmental and cleanup liabilities, underestimated pensions and other retirement benefit liabilities, etc). Also, if you are minority shareholder, you cant force the company to liquidate and give you the cash on hand - and management is hardly ever incentivized to close down the business and liquidate, because then they lose their jobs! Also, liquidation takes time, and bad businesses will destroy value over time, reducing the value by the time the liquidation is finished - think of Sears, where the real estate has been worth dramatically more than the stock price, but the retail operation is eating billions of value each year, and can't be liquidated overnight.




innerscorecard

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Re: What to do with crappy stocks?
« Reply #21 on: February 07, 2015, 10:27:14 PM »
I differ from the common wisdom of the board and am not an indexer, and I believe the evidence supports that the market is inefficient, but from the sound of it your husband is a speculator or gambler and not an investor. If he is handling any more than a small portion of your net worth, I'd be very concerned.

Most of the great investors throughout history and existing today have been value investors. I think the best book to read on this subject is Seth Klarman's book Margin of Safety - here is a discussion and a link to the book (it's out of print): http://theconservativeincomeinvestor.com/2013/08/07/seth-klarmans-margin-of-safety-the-most-legendary-book-in-personal-finance/

I'd highly encourage anyone investing in individual stocks to read the book. The very first point made is the difference between investment and speculation. Speculation is buying something because you think someone else will pay more for it tomorrow. Investing is buying a stock because it is a piece of a business that you expect to produce cash flows that will more than compensate you for the price you are paying. Margin of Safety, the title of the book, is the concept that since future cash flows are inherently uncertain, you should only buy a business at a substantial discount to what you believe its value to be, giving yourself a margin for error in your calculations.

Non-productive commodities like gold are the definition of speculative assets. Even if gold falls 50% from the price it is trading at today, you could not buy it with a margin of safety because there is no way to calculate the value of gold - it doesn't produce any cash, it just sits there and looks shiny.

Value investing is all about buying out-of-favor businesses and assets, but only when those businesses and assets are out of favor for bad reasons. Sometimes stocks fall X% on news of a bad event that reduces the value of the business by .5X%; sometimes, the bad event actually reduced the value of the business by X% or more, and buying at that price doesn't indicate you are getting any better value today than yesterday.

On the subject of buying companies below the value of their net current assets, while this can in theory be a great idea (Buffett made a killing buying so-called "net-nets" when he was running his partnership in the 1950s and 1960s), in today's world there is generally a reason why these companies are trading at such levels. It's too easy to run a screen to find these ideas for many good ones to exist. In reality, there can be many pitfalls with buying these companies - for example, there may be liabilities that are off balance sheet or underestimated (for a retailer, think operating leases which you won't find anywhere on the balance sheet but are contracts that can't be killed off at will; for a miner, think of potential environmental and cleanup liabilities, underestimated pensions and other retirement benefit liabilities, etc). Also, if you are minority shareholder, you cant force the company to liquidate and give you the cash on hand - and management is hardly ever incentivized to close down the business and liquidate, because then they lose their jobs! Also, liquidation takes time, and bad businesses will destroy value over time, reducing the value by the time the liquidation is finished - think of Sears, where the real estate has been worth dramatically more than the stock price, but the retail operation is eating billions of value each year, and can't be liquidated overnight.

I don't think Margin of Safety is at all a good first book to read for someone with no real investing or business experience, as I've explained on my blog. It's a great book for those who already have spent some time in the markets. For those with less experience (and that includes those who have only speculated, and not invested), I think one first needs to learn about the efficient-market hypothesis.

morning owl

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Re: What to do with crappy stocks?
« Reply #22 on: February 08, 2015, 07:01:33 AM »
The companies he's in DO have cash value. He says most of them are trading at below their cash value right now, which is why he's holding on to them.

These are stocks of companies actually trading below their immediate liquidation value (cash value)? (i.e. net current assets - total liabilities)

Yes.

Phillyvalue, thanks for the advice, and for the book link. I will check this out.

I consider myself a value investor, but I'm still learning. I'm not at all concerned about DH handling his own investments. We each handle our own investments, and though of course it's 50/50 in a marriage, I really value this independence of thinking differently and making our own mistakes. He is not clueless about the gold industry, or about investing, so I have to give him freedom to make his own choices. I posted here just in case there was something I was missing, because though I'm unsure about these investments, as they don't fit with my own more conservative methods of investing, I wasn't sure how to form my argument and try to convince him to sell them.

Like I said above, I've tried to convince him, but I'm letting it go. Buying these stocks was a decision he made several years ago. As these stocks have slowly sank lower and lower, he's seen my own (conservative) portfolio do quite well. He also manages his mothers investment account, and ironically because he has invested conservatively for her, her investments have far outperformed his own. And he sees this. So he has switched gears for himself. These gold stocks are remnants of past methods that he no longer uses. He's unwilling to sell them at a low, but ultimately it's his choice. I'm not going to force him to sell them, as they will ultimately end up being a very small part of our portfolio. If they remain at their current price, this will eventually amount to less than 5%, once the portfolio hits "the number" for FIRE. The remaining 95% of the portfolio will be in bonds and blue chip cdn and U.S. dividend paying stocks.

phillyvalue

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Re: What to do with crappy stocks?
« Reply #23 on: February 08, 2015, 12:53:33 PM »
I differ from the common wisdom of the board and am not an indexer, and I believe the evidence supports that the market is inefficient, but from the sound of it your husband is a speculator or gambler and not an investor. If he is handling any more than a small portion of your net worth, I'd be very concerned.

Most of the great investors throughout history and existing today have been value investors. I think the best book to read on this subject is Seth Klarman's book Margin of Safety - here is a discussion and a link to the book (it's out of print): http://theconservativeincomeinvestor.com/2013/08/07/seth-klarmans-margin-of-safety-the-most-legendary-book-in-personal-finance/

I'd highly encourage anyone investing in individual stocks to read the book. The very first point made is the difference between investment and speculation. Speculation is buying something because you think someone else will pay more for it tomorrow. Investing is buying a stock because it is a piece of a business that you expect to produce cash flows that will more than compensate you for the price you are paying. Margin of Safety, the title of the book, is the concept that since future cash flows are inherently uncertain, you should only buy a business at a substantial discount to what you believe its value to be, giving yourself a margin for error in your calculations.

Non-productive commodities like gold are the definition of speculative assets. Even if gold falls 50% from the price it is trading at today, you could not buy it with a margin of safety because there is no way to calculate the value of gold - it doesn't produce any cash, it just sits there and looks shiny.

Value investing is all about buying out-of-favor businesses and assets, but only when those businesses and assets are out of favor for bad reasons. Sometimes stocks fall X% on news of a bad event that reduces the value of the business by .5X%; sometimes, the bad event actually reduced the value of the business by X% or more, and buying at that price doesn't indicate you are getting any better value today than yesterday.

On the subject of buying companies below the value of their net current assets, while this can in theory be a great idea (Buffett made a killing buying so-called "net-nets" when he was running his partnership in the 1950s and 1960s), in today's world there is generally a reason why these companies are trading at such levels. It's too easy to run a screen to find these ideas for many good ones to exist. In reality, there can be many pitfalls with buying these companies - for example, there may be liabilities that are off balance sheet or underestimated (for a retailer, think operating leases which you won't find anywhere on the balance sheet but are contracts that can't be killed off at will; for a miner, think of potential environmental and cleanup liabilities, underestimated pensions and other retirement benefit liabilities, etc). Also, if you are minority shareholder, you cant force the company to liquidate and give you the cash on hand - and management is hardly ever incentivized to close down the business and liquidate, because then they lose their jobs! Also, liquidation takes time, and bad businesses will destroy value over time, reducing the value by the time the liquidation is finished - think of Sears, where the real estate has been worth dramatically more than the stock price, but the retail operation is eating billions of value each year, and can't be liquidated overnight.

I don't think Margin of Safety is at all a good first book to read for someone with no real investing or business experience, as I've explained on my blog. It's a great book for those who already have spent some time in the markets. For those with less experience (and that includes those who have only speculated, and not invested), I think one first needs to learn about the efficient-market hypothesis.

I read your blog post, and I think what you are saying makes a lot of sense. In my case, I had completed part of an undergrad degree in economics before reading any value investing books, and concepts like efficient markets and the capital asset pricing model were already drilled into my head by that point.

I think in addition to what you had mentioned, there are many clips on YouTube from lectures Warren Buffett has given, and they may be a good intro into the basic mindset of value investing.