Ouch! Losing Speculations Can Hurt!
Both pride and capital can take a hit when a speculative investment crashes.
6 Lessons From A Speculation Loser:
Speculations fail fast
Court can kill money
Never average down
Sell a speculative loss
Psych games cost
Litigation is risky
A running family joke developed when I was a boy. My Dad, a creative guy receptive to new ideas and approaches, at times had projects go off the rails. When something he tried did not go as well as hoped, he would look at me and say, “let that be a lesson to you!” As if disasters were especially arranged for my benefit! What I learned was, “be careful around this man”!
Well now I feel like my Dad must have felt on those occasions. And I do hope you learn a lesson or six from this following disaster report!
Once, one of my speculative recommendations, Wi-Lan, (WIN on the TSX) the patent holding company, lost a major court case. Although management was confident the case was theirs to win, they didn’t! The jury said no, WIN loses. In the minutes after the announcement almost ⅓ or 32.79% of the equity value evaporated.
Lesson 1: Speculations fail fast
When speculations don’t work, consequences are quick and costly. Losing in court made WIN immediately look like a losing stock. So it is best to take the hit, accept the loss and move on.
Most often, when you are on the wrong side of a deal, taking that first loss is the best loss. It is the cheapest lost because most often the stock falls further. Leave the cleanup and aftermath for someone else.
The technology sector has dozens of companies with shareholders still “holding on” as they wait for the big inevitable come back. That money is dead. The facts are, most of the time, the comeback does not happen for the shareholders at the time of bad news.
In such cases the company and technology may very well survive. But frequently refinancing or restructuring happens. That further devastates existing shareholders. So the company and technology survive but the shareholders get financially hollowed out. Most often they do not come close of making back the loss.
In the case of WIN there is no risk of going out of business. I do think the market reaction, as usual in such cases, is overdone. WIN sits on a pile of cash, has strong positive cash flow and many customers around the world under long-term contracts. So they could very well come back and remain financially strong. But, making that bet runs the risks up even higher.
I expect WIN will bounce back about 10% or about one-third of the drop. A bounce is common the day after such a plunge. The recovery will get nowhere near the amount of yesterday’s drop. Do not let it give you any false hope.
Lesson 2: Court can kill money
This lost court case means that funds put into the WIN speculation turned into dead money. The speculative bet was wrong so salvage any money you can by selling. Bring the money back to life; put it into a positive situation.
Lesson 3: Never average down
That is Never, NEVER average down by buying more at lower prices on the theory that your average cost gets you closer to break even. The average down theory says that a much smaller recovery gets your money back.
Even when that approach works, you neutralize even more money than the amount first invested in the speculation. Stocks take time to recover. That means you have underperforming capital for a long time. Combined, these factors harm your overall portfolio performance.
Better to sell out. Stop the pain. Most importantly, get that money working for you in a performing investment.
Lesson 4: Sell a speculative loss
If or when you speculate and lose, sell. Even when taking a trading position that didn’t work as you wanted, sell. Face facts; the speculation did not work. The only response is to sell. Get out of a loser. Move on by getting any remaining money to work in a positive position. Your speculation lottery ticket didn’t win. Accept it.
Lesson 5: Psych games lose money
Playing a psych game with yourself in the market is very costly. Do not go through any mental gymnastics pulling a mid-stream strategy change. Do not begin to call a losing speculation a long-term investment. Do not rationalise or try to explain why you don’t or will not sell. Sell and be done with it. This time WIN was a loser.
Lesson 6: Litigation is high risk
Betting on litigation is very high risk. Trying to make money betting on the outcome of a court case is a very high risk bet.
Lets hope my loss is a lesson that you can profit from!
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