Bad investments don’t make you a bad investor. We often learn the most from our worst investments. The trouble comes when you don’t learn from your mistake. Take a beat and look through your holdings. Why is that investment a loser so far? Is the underperformance a temporary setback or is it more pervasive to the company as a whole? Most importantly, ask yourself: Am I making this mistake elsewhere in my portfolio?
For example, a long term loser I’ve had on my scorecard is Ford (NYSE: F). Over the years I’ve owned it, Ford is down around 34% compared to the market’s gain of 91% (including dividends). I initially invested in Ford as a potential long-term value play based on a successful turn around. In fact, over the years, I continued to invest more and more of my capital into the Blue Oval in a race to the bottom. Since then, I’ve checked through my portfolio for similar mistakes: Are any more of my investments based solely on a turnaround? Am I over exposed to the auto sector? Is there anywhere else that my capital may be better deployed?
3. Don’t double down
If a company doesn’t pass your assessment, there’s no need to sell out — but don’t add more. It can be painful to throw in the towel on an investment, but try to separate emotion out as much as you can. Many investors feel a need to double down on a losing stock, but you should resist this urge. Many times, a correction in a company’s price is temporary, but a long term pattern of disappointment is different. When a company is fundamentally flawed, its returns are often not worth the time it takes to turn around. Don’t make the mistake of throwing more good money after bad.