Breaking up is hard to do
The romantic truth about selling stock
Investing in individual companies’ stocks, which I think is a good idea for American expats, sounds pretty dull. That’s often true, but it gets interesting because it shares some similarities with a love affair.
Infatuation
Most love stories are about the beginning. The delight in discovering each other. The problems that have to be overcome. The sacrifices and trade-offs. Looking for, and noticing, every sign of your beloved. In those early stages you see the positives and gloss over the negatives.
Disenchantment
But the infatuation phase doesn’t last. Irritations arise. Unrealized shortcomings are revealed by the vicissitudes of life. There may be a disaster or a betrayal. Your beloved seems, well, more ordinary than you first thought.
Such events and realizations can raise a distressing question: Should I break this off? Answering that question can be difficult. Well, it was for me. It happened with my first common stock relationship.
My father arranged a marriage
I didn’t choose the beloved stock. It was arranged without my knowledge or permission by my father. He passed on to me in his will some shares in a company called United Technologies. So this love/stock story began as a shotgun wedding.
I learned that UT was a utility company with a long record of steady growth and regular dividends. In those days it was called a “widows and orphans” stock because it was a very safe investment. My father had been ill, and I realized his choice for me was made with the best of intentions. I wasn’t in love exactly, but I became very fond of what UT offered.
For a few years my relationship with UT went very well. We led largely separate lives, but the regular dividends were most welcome. UT’s value also grew steadily. My arranged marriage was working as my father had anticipated.
An unexpected accident
It wasn’t UT’s fault exactly, but they got caught up by events. One of their subsidiaries managed a nuclear power plant near Three Mile Island, Pennsylvania. That plant became the site of the largest reactor failure in US history. A cooling pump and related failures led to a shutdown. Billions of dollars were lost.
Of course this was bad news for UT. However, there were no fatalities and no radiation leaks, so I hoped for the best. Nonetheless I began to question my relationship with UT. I hoped the value in the UT share value, which was over $100 before the “incident”, would recover.
People told me to break up UT. Well, 1 person did. The share price had dropped to about $90 when my stock broker called (those were the ancient times when you had to have a stock broker to consort with stocks). He told me that I should dump UT and move on with my life.
I didn’t, probably because UT had an emotional link to my father.
For many months the stock steadily declined. I couldn’t accept the reality that recovery was unlikely, and I continued to hope for a turnaround that never came. I finally sold my United Technologies shares at less than $10.
My inability to sell wiped out 90% of our relationship’s value. Sorry, Dad.
Lessons learned
I’ve concluded from my UT and other experiences that buying is almost always easier than selling. Buying is accompanied by hope and optimism. Loss-prevention selling is accompanied by darker emotions and negative self assessments.
There are no cures for loss in love or investing. However, there are several treatments that help with the pain.
First, have a diversified portfolio. Diversification is like a flu shot. It doesn’t completely prevent the pain of losses, but it inoculates you against becoming too invested in a particular company. Sure, X may have dropped, but Y and Z and others may have done well.
Second, use a system that takes immediate sell decisions out of your hands.
Owning an ETF (exchange traded fund) does this because its managers make the buy/sell decisions for you. Alas, as I’ve explained elsewhere, non-US ETFs don’t work for middle American expats because of extremely high tax preparation costs.
However, you can clone an ETF by buying their management’s top stock picks. If a stock drops out of their list of top investments, you take their cue and sell the same company in your portfolio. You’re spared the hard choice of whether or not to break up.