How do you know if you picked a losing investment?

Our company recently had a storytelling seminar with the CEO of Trip Wire Media Group, Doug Darling, and during the session, he mentioned that ‘A goal without a plan is just a wish’. I found that statement to be so profound yet so simple. We create these narratives in our minds as to why a certain investment will turn around for the better, despite not meeting our expectations. Often we find ourselves holding a stock without a goal and strategy in place. A big part of wealth management is coming up with solutions that allow people to meet their goals and live a life that is memorable for themselves and their families. In order to meet those goals, you need to make sure that your investments are on track to do what they are expected to do, and if that’s not happening, what plans and systems do you have in place to pivot from one investment to another.

In the past, we’ve written various blogs on how to get better investment returns. I thought I should take a different approach with this week’s article and write on how to identify a losing investment. The principles below are obviously not encompassing of all the risk mitigation techniques used in wealth management, but nonetheless are fundamental, if not essential to ensuring long-term positive returns. With that being said, we can now dive into how to identify a losing investment.

What Are The Odds

What are the odds of your stock pick going in your favour?

Mohnish Pabrai is an internationally acclaimed investor that described an asymmetric bet as a coin flip where tails I win, heads I don’t lose much. As an investor, you always want to make sure the odds are stacked in your favor. Warren Buffet follows a similar investment approach and is notorious for investing in bitten-down stocks or what he likes to call ‘Cigar Butts’. The two investment approaches are similar in the sense that the potential upside greatly outweighs the downside risk. As a rule of thumb, you know you’ve picked a losing investment when you buy into the market at an extremely inflated price. At these prices, the odds of making a positive investment return are stacked against you.

Bear in mind that you should always look to invest for the long term and never try to time the market. But with that being said, your entry point does matter. On our end, we’ve been watching some extremely innovative and disruptive businesses, but it wouldn’t make sense to buy into these companies at their current prices just because their actual value doesn’t align with the stock price.

Is The Company Really That Special

When it comes to picking winners and losers in the stock market, it is crucial to look around and see if there are any other companies competing in a similar space. One thing to look for in a company is if it offers a service or product that is proprietary to them. You know you’ve picked a losing investment if the company is operating in a market with low barriers to entry.

Let’s take Peloton for example. The company is in the business of offering at-home gym equipment and produces workout videos that customers can live-stream through Peloton products. I can totally see the hype around the products that Peloton sells, but from a financial perspective, I personally wouldn’t put my money into a company that sells stationary bikes that come with a screen attached to them. To put things into perspective, Peloton went public at $25.24 in September of 2019, peaked at $162.72 in December 2020, and is currently trading at $11.12. That right there is the perfect example of what happens to a company that offers nothing proprietary.

As a disclaimer, I could be completely wrong about Peloton and for all I know, it could end up being an extreme hit in the next 20 years.

Sometimes It’s Not The Stock With a Problem, It’s the Investor

Over the years, we have written extensively about the cognitive biases that produce poor investment returns. Being an observer of your emotions as opposed to a reactor is vital when it comes to ensuring long-term profits. It’s easy to think that a drop in stock prices correlates to an underlying problem with the business but often this isn’t the case. In the short term, fluctuations in stock prices are a result of macroeconomic factors such as interest rates rising, but seeing that we are long-term investors the main driving force for positive returns are the earnings that the company is able to produce.

Investing is a game of time and patience, you have to be ok with your stocks going down for an extended period of time before you see any returns. In one of our past blogs, we wrote about how 10% of the total return of a stock comes from the first 3 years of owning it. The next 5 years contribute 15% to the total returns experienced by the investor. Holding for 8 years and beyond is responsible for 75% of the total investment returns the investor will experience. What this tells us is that we have to suppress our desire to sell a losing investment in the short term in order to guarantee long-term investment success.

Putting It All Together

We could touch on multiple reasons as to why an investment is not worth putting your money into, but I thought it would be important to stress the three principles mentioned above. While writing this blog I couldn’t help but realize that a lot of these ideas transcend beyond investing and can easily be applied to life and business. Just like investing, you always want to put yourself in situations where your odds of success greatly outweigh the potential downside. My call to action for this blog is to have you assess various aspects of your life be it investing, growing a business or pursuing your career goals, and have you identify what areas you can work on in order to have the odds of success in your favor.

If you found this blog interesting I would suggest reading one of our previous articles titled Hack Your Biases For Better Investment Results.

-Kondwelani Kalinda, Financial Planning Assistant

Kondwelani Kalinda is a Financial Planning Assistant at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Kondwelani Kalinda who is a Financial Planning Assistant for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.