I'm a schmuck.
I probably spend about 99% of my due diligence on finding companies worth buying. That doesn't leave a whole lot of time to devote to stocks that I already own and are worth selling.
It doesn't make sense. It's like learning how to take off and fly a plane without brushing up on how to land. And I'm probably not alone.
I blame Hollywood, of course. Why not? Romantic comedies emphasize two lovelorn strangers coming together, but there really isn't much of a market for films about eventual breakups. Where art thou, Annie Hall?
Walk a red mile in my blue suede shoes
I don't have to go too far into my portfolio before I stumble. For example, I bought shares of MIVA (NASDAQ:MIVA) back when it was FindWhat.com. Taking the paid-search model pioneered by Overture and running with it, MIVA was growing quickly as advertisers took advantage of the Internet to attain interested leads for just pennies an introduction.
There was a time when Overture and MIVA were the only two profitable players in this very promising niche. I was right about the market; I was just wrong about MIVA. Eventually, the company's fundamentals began to come undone like a raggedy sweater. The quality of some of its sponsors was suspect. The company decided to stop reporting its quarterly metric of earnings per click. It just wasn't growing as briskly as the competition.
The warning signs were there, but I ignored them. I preferred to lean back on my initial hunch, even though the entire foundation had changed. I cashed out. I took a bath on MIVA and still came out feeling dirty.
A similar thing happened to me more recently with Great Wolf Resorts (NASDAQ:WOLF). The company went public a little more than a year ago, and I had admired it from afar before that. The company was the leader in a booming niche of building destination resorts with massive indoor water parks. With a growing market and healthy projected profitability, I bought in. I also felt strongly enough about the company to recommend it as part of the Rule Breakers newsletter service for ultimate growth investing.
Unlike my earlier picks for the newsletter, however, this one flopped in a hurry. The company warned that it would miss its guidance. Then it warned that it would miss it again. It had to sell a stake in its two original resorts to bankroll future construction.
I smelled the stink quickly enough to realize that this was not an "ultimate growth stock," so subscribers were told to bail. I should have followed suit. Instead, I held on to my shares in hopes that maybe this would work as a real estate value play. That hasn't worked out either: The stock has since shed another 30% in value.
The dip that refreshes
"I won't sell" are many an investor's famous last words. There's no glory in going down with the ship if you are little more than a stowaway. But I'm not saying you should be a frenetic trader, either. The "buy and hold" philosophy is time-tested and true, but that assumes you're buying the right stocks and not overreacting to the Chicken Little chatter that ultimately proves hollow.
I am certainly glad that I held on to Netflix (NASDAQ:NFLX) even after its shares fell down into the single digits a year ago. A price war was looming. The competitive threat was mounting. I didn't flinch, though. I knew the financial state of its largest rival. I also knew that the biggest potential threat to Netflix -- that Amazon.com (NASDAQ:AMZN) would storm into the market of DVD rentals in this country -- wasn't feasible for Amazon at the rock-bottom subscription prices that Netflix was charging. I didn't panic, and it paid off for me, as well as for the Stock Advisor subscribers who are sitting on a double after David Gardner recommended the stock 14 months ago. (Amazon itself is a longtime Stock Advisor pick.)
This doesn't mean a sharp market-crusher like David doesn't forget to sell sometimes. He recommended the purchase of Krispy Kreme (NYSE:KKD) in the summer of 2003 and held on for the next two years. There were accounting scandals, defections at the top, and franchising shenanigans along the way, yet he believed in the brand and the product. He suffered through a humbling 89% slide, riding a company that had more holes than its doughnuts did. The catch, though -- and this is important -- is that his Stock Advisor picks are loaded with more Netflixian winners than Kremesque blowouts. His average pick has marched 47% higher during a time in which the market averages have inched up by just 19%.
David's hits and misses are available to all Stock Advisor subscribers, and you can even check the recommendations out for free with a month-long trial if you're still undecided. The point is that some stocks bounce back, while others don't.
Sell the eggs, buy the tennis balls
What came first, the tennis ball or the egg? A mutual fund company used to market the fact that its fund managers bought tennis balls over eggs. Tennis balls bounce back after they hit the ground. Eggs? Well, they go splat and can make a pretty good omelet -- at best -- if they fall.
A company like Apple Computer (NASDAQ:AAPL) can spend years in a holding pattern, trading for little more than the cash on its balance sheet until that one runaway hit -- in Apple's case, the iPod -- rescues it from the nadir. On the other end of the computing spectrum, you'll find a company like Gateway (NYSE:GTW), which peaked a little more than six years ago and has since shed more than 95% of its peak value after misguided initiatives and diversification have nibbled away at its cash.
Hollywood's romantic comedies take you from the first date to the altar, but the relationship doesn't end there. You need to allow time to get to know your stocks a little better and take an unbiased view of all of the changes that take place. Needs change. Priorities reshuffle. Seasoned lovers drift apart because of irreconcilable differences.
Dull and depressing movie? For sure, but it's the key to brilliant and "happily ever after" investing.
Longtime Fool contributor Rick Munarriz has seen a few of those dull and depressing movies lurking in his portfolio over the years. He does own shares in Netflix and Great Wolf Resorts. T he Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
