Caroline Ritchie: Ditching the dogs

Caroline Ritchie

Before the first broker ever hung his shingle outside the door, he must have been thinking: "Getting people to buy shares will be easy, it's the selling that will be tricky."

What he probably didn't realise was that it was going to be even more difficult to get investors to bail on bottom-dwellers than to have them cash in on the winners.

Selling the duds. The un-fun part nobody likes to talk about. Losing stocks are like sausage meat without a casing - unattractively splattered within the portfolio, exposed for what they are. The tendency is to ignore them, feed them to the metaphorical finance-cat under the table and then forget about them.

Pride, hope and attachment, the usual suspects, create personal delusions about what to do with badly performing shares. If directly invested, choosing individual shares yourself or having an advisor do it for you, these are going to be felt slightly more than if you are plumped into a large index.

The index will absorb and mask those dragging the chain but when you sit and look at your 20 carefully chosen little stock darlings, three of which have bombed, it gets bit more real. Rather than wallow, there are ways to move onwards and upwards.

The first is acceptance. No forward action is ever going to happen without it. Completely get over the fact you have chosen something awful. This is your ouch-moment with pride - admitting stuff did not go your way.

Shares can tank for all sorts of reasons - poor business choices, the board all killed in a plane crash, (actually happened to one of my 2006 calls), commodities implosions and big banks manipulating the share price.

You cannot control those things and if it all goes to hell, tough, this is stock picking, get used to it. If you do not like the idea of this ever happening to you please stay with bank assets and premium bonds. I know a nice, easy going fixed interest advisor who can assist.

Once you have accepted the status as it stands, you need to make an honest, logical stab at whether recovery for the wounded soldier is possible. Attachment will keep leaping up and trying to distract you. Hope keeps bouncing around going what if, what if, what if? Resist.

What is the realistic expected outcome for the company? If the forecast is dreadful and others in class look distinctly brighter, then switch. Or, if this experience has scared the pants off you, lower your risk profile and buy something else entirely.

In either case you will be making a loss on sale with the aim of making better returns elsewhere. You may or may not get your money back. However, the idea is to try rather than stumble on and do further damage.

Portfolios over-filled with sad memories are not just annoying for money lost, they play on your mind each time you look. Clean up the thing. Get the dirt off the page and move on.

Investors gargle with angst at taking losses, but they are in the nature of paddling about in this pool. Experienced players can sometimes recognise a sinking ship early on and minimise the pain. It requires staying highly unemotional. Not clinging on for miracles or white knights because you have fallen in love with the company, or the people within it.

Keeping feelings out of investing is a real talent worth aiming for. You are going to need it when you come to ditch the inevitable dogs. Learning to take a loss well, or at least not badly, is one of the best ways to win in the end.

¦Caroline Ritchie is a former AFA, sharebroker & portfolio manager. She runs Investment Stuff, a sharemarket based investment coaching service. Visit her at www.investmentstuff.co.nz This column is not personalised financial advice.