It can be difficult to push the buy button after you're already down on a stock you love. On a recent Fool Live show, recorded on Nov. 18, a viewer asked Fool.com contributors Matt Frankel, Dan Caplinger, and Jason Hall how they should approach their Lemonade (LMND -1.34%) investment, which is down big from their purchase price.
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Matt Frankel: Before we go, we have a couple of questions here on Lemonade. PandaTears420 asks -- and this is a great mindset question, not just on Lemonade: "My cost basis for Lemonade is $150. I hear you that it's a bargain, but seeing all that red makes it hard to invest more." Understandable. "I wish they would get their loss ratio down." On the loss ratio, Lemonade's loss ratio was 77% in the most recent quarter, their target is under 75%.
They're not too far off, but in the insurance business, those small percentage points make a big difference. I agree, I would like to see them get their loss ratio down. I think it's the business scales that'll get a little bit more efficient. But what do you guys have to say to somebody who bought in at a much higher share price and thinks it's a bargain, but is having a tough time parting with any more cash?
Jason Hall: I think you look at the results of the business. The thesis seems to be working out. They are adding customers at an enormous rate. Customers are giving them more money. They're growing premiums. They're launching new products. They are bringing those products to market successfully. I think it's easy to get caught up in that, don't dollar-cost average down, dollar-cost average up. Winning stocks continue to go up. But really, winning stocks are the stocks that go up, that's a signal to find out if the business is executing well. The thesis isn't broken here. I think that's the biggest thing. It's just how the market is valuing the company has changed, but the thesis is playing out exactly as we should have expected.
Dan Caplinger: Yeah, I think from a mindset perspective, it's always helpful, and I know it's maybe too late for this particular viewer, but it's always helpful to know in advance what your rationale is going to be when it comes time to make purchase number two of the stock.
If you always intended to make repeat purchases of Lemonade, then I don't see anything in the actual fundamental results that would change your mind about that. If you didn't necessarily know how you're going to deploy additional money, you're just making that first purchase and calling it good, then you see where things were, then I could see going on in a number of different directions with it, depending on where things are.
If you have other stocks that you're more excited about, you have more conviction about, you really want to hold back and watch Lemonade make good on some of its potential before you start investing additional capital. I totally understand that. That's a perfectly acceptable way to go. But if you're more value investor, you like to go against the grain and when you see share prices, what you see is unreasonably reflecting a discount that you think the company is going to be able to overcome, then, by all means, take advantage of it when you get a chance.