Focus on Finance: How to avoid stock market losers – Elizabethtown News Enterprise

Question: I bought a substantial investment of a common stock and it is down 10 percent. Should I sell now or wait for a recovery?

Answer: There is no certain answer for your question because the answer depends on the company, why it is down, the confidence you have in management, etc. To help you, I will tell you the story of one of my losers this year and the mistakes I made getting to where I am.

The company I invested in is a business development company. Business development companies loan money to companies that need capital to improve their business, add additional products, etc., and who cannot borrow money from banks because of risk factors.

My first mistake was investing in a company that invested in risky businesses. Initially, the company had about $480 million in loans in 2010. They managed that well and the stock price rose from the initial offering price of $20 up to $29. I kept buying on the way up. Then, more capital was needed and more stock offerings were made to raise more money for loans, thus diluting the price of my shares.

The stock dividend stayed high as the earnings were good, but the price drifted back to $20. By 2017, the company had $1.7 billion invested. It seems it was hard to find sound companies to loan money to at this level and quarterly reports started to talk about non-performing assets (bad loans). This was the first indicator of trouble.

In 2016, the CEO suddenly retired and was given a fat buyout. This was a definite warning sign I ignored. Then, the company issued more stock just to prop up the dividend payments. Price then was about $17. This would have been a smart time to sell. Then, this quarter, the dividend was cut as the non-performing loan problem continued to get worse. Now the stock is at $9.61 and I must hold on hoping someone will buy them out at around the net asset value, which is $13.20. So, what are the lessons?

1. You can lose money in stocks.

2. Recognize the risks inherent in the companies in which you invest. The more the risk, the quicker you sell when financial results start to drop.

3. Pay attention to news on the company. I ignored danger signs in the news because I was getting a high dividend on the stock. When CEOs leave a company for something other than health reasons, there usually is a reason why.

4. When you see danger signs, sell before the disaster.

5. If you are a retiree, minimize investments in risky companies such as business development companies.

6. Everybody who invests in stocks has losers, even Warren Buffett. Keep the number of losers to a minimum.

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