3 Lessons Investors Need to Learn
As I was about to stroke the pedals of a Spinning bike Saturday morning, the instructor called me out for my pending birthday. Of the various supermodel-moms assembled in the row in front of me, one turned and asked if I was turning 22. When I told her 37, she smiled in disbelief and said, "Well, you're doing something right."
It took me about 14 seconds to relay that story to my wife when I arrived home. I've learned over the years that it's actually good for the mind to bring yourself back down to Earth frequently.
I spent much of the rest of the weekend looking back on my investing history. I uncovered several recurring themes that can help reiterate things we already know, should know or never knew.
Stay Away From Low-Priced Stocks
I beat this theme to death. I am well aware of this. With the volume and proliferation of people touting low-priced stocks, somebody needs to hammer home the Stay away from low-priced stocks mantra. I can only hope the persistence does not produce an outcome akin to Nancy Reagan telling us to just say no.
While reviewing my recent investments, I noticed a common theme. By and large, low-priced stocks make up the losers.
For example, I recently closed a position in Nokia(NOK) for a 35% loss. I terminated stays in Cumulus Media(CMLS) and Wendy's(WEN) for 19% and 10% losses, respectively. These three stocks have share prices under $5 in common.
I only closed one other trade recently -- in Verizon(VZ) . Thinking the run I enjoyed was topping, I pocketed an 8% gain. Most of my other positions -- mainly in stocks not classified as low-priced -- are open and somewhere around even or up considerably. When down, I have had success averaging down (on general market weakness or stock-specific noise) in all of them. I only get a little nervous about the low-priced ones that remain, such as Zynga(ZNGA) .
Use Stops on Speculative Investments
I'm down by about 9% on my ZNGA position, as of Friday's close.
Because I truly believe the stock is cheap -- and not just because it hovers around the $5 mark -- I have no problem buying more when it dips below my threshold. That said, it's a speculation. If ZNGA turns into a NOK -- a stock that never seems to stabilize after a series of implosions -- I will need to exercise a mental stop to make an acceptable exit.