Distracted investing misses profits. This lesson explains how distracted investing misses profits. Links at the end guide you to related lessons if you want to learn more.
Wealth Building Portfolio Management, Lesson 3, outlines the importance of investors paying attention and not be distracted from the need to manage your investments. Links at the end guide you to related content if you want to learn more.
What’s in this lesson for me?
This lesson can put money in your pocket by pointing out the need to remain aware and ready to actively manage investments. Being aware of distracted investing risks helps avoid this portfolio management mistake.
Misses, write offs, bad math and distracted investing costs money!
Buying bankrupt can bankrupt you!
Liquidations are very profitable, for those on the right side of the deals! That is the people in the know and in control. Outsiders need not apply to this inside game.
A business turnaround can rapidly consume shareholders equity. That means buying those shares early is a very high risk move. Far too often some or all shareholder equity goes to zero.
This is an area of business that I know far better than most. I spent much of my career doing turnarounds and liquidations.
Do not be in a rush to buy early. Too many investors buy in early thinking the company has no place to go but up. For company operations that can be correct. But the financial obligations carry on. Costs of the past and financial needs for the future can cut shareholder equity. Even when there is an operating recovery, dilution of existing shareholders can be massive.
Shareholder dilution can water down returns
To finance the future, the company often sells shares to raise the necessary capital. This has the effect of dramatically cutting the value of for any existing shareholders. On the other hand, if the company can’t raise capital, the value of all shares is going to zero. All investors then lose as well as employees and the economy.
In very rare circumstances, when it works, results are spectacular. But rarely for common shareholders. Most often those in control make a big score.
Bankrupt is kaput. Especially for new investors, simply avoid the entire headache and costs. Do not buy shares in any bankrupt company as a turnaround play.
Averaging down sinks investor performance
Investing misses, write-offs, bad math and distracted investing all combine in the most common of investing sins, averaging down. This really bad but very common strategy can seriously harm your portfolio.
Averaging down means you buy more shares in a loser. Naturally if you keep buying as the price keeps declining, the ever lower costs get, averaged down. This is an awful way to build wealth. It doesn’t work.
The theory is that these new, lower priced shares, when averaged with the higher cost of the shares bought at higher prices, “averages down” your cost per share.
With that new lower cost you have a better chance of making money or at least breaking even because the share price has to rise less to break even. This mathematically correct but bad strategy, puts more money into portfolio losers. But it is really bad math that can dearly cost you.
Superior investors sell losers to buy winners
Instead of selling and moving your capital to a winner, you own even more of a loser. At best, that puts your capital in a coma, even when it does not kill it.
As the average down strategy responds to any big share price drop by buying and not selling, the effect ties up a proportionally larger slice of your portfolio in a dead stock.
The theory goes that with a lower average cost you are closer to break even than if you did nothing but hold your original position. With an averaged down total share cost, the price of the shares has to rises less to recover all your capital.
Owning a bigger piece of a loser is never a good strategy. In fact we want no losers. We want to find and invest in more winners. You get them by selling losers and buying more winners.
One change can increase your returns
Making this one change in your investing approach will dramatically improve your overall performance. If averaging down has been your approach in the past you can easily check my claim on your financial statements.
Just note the amount of your funds tied up in the shares of any loser. Calculate the result of taking those funds into shares of the best performer in your portfolio. Swap any loser shares for more winner shares and watch your portfolio grow!
Not only will that simple change dramatically improve your results, it actually lowers your risk by putting a greater portion of your portfolio in performing holdings. Talk about a simple way to get a big win!
No distracted investing, keep eyes on the road to your future
Investing misses, write offs, bad math and distracted investing all apply to investors that do not pay attention. Failing to pay attention while investing risks losing your capital!
Not paying attention has financial risks as great as not paying attention while driving! It risks health and property! Not paying attention to your investments significantly risks your wealth. Even with a financial advisor, paying attention pays you big time!
Do all you can to become an informed and knowledgeable investor and client. Avoiding basic investing misses like, write offs, wrecks and not watching puts you ahead. The results will show up on your personal bottom-line.
Earn the highest hourly rates of you life, learn to invest
If you give as little as an hour a week to your investments your knowledge and performance can significantly improve. Giving more time will further improve your performance. Learn to invest and earn returns for a lifetime.
Why this lesson matters
This lesson can put money in your pocket by pointing out the need to remain aware and ready to actively manage investments. Being aware of distracted investing risks helps avoid this portfolio management mistake
Key take away points from lesson 3,
Distracted investing misses profits:
Distracted investing misses profits. This lesson explains how distracted investing misses profits. Links at the end guide you to related lessons if you want to learn more.
- Investment portfolios need management.
- Superior investors buy income producing investments.
- Superior investors are not concerned with buying early.
- Be wary of managements that dilute shareholder value.
- Never ever average down – get out and find a better investment.
- Superior investors sell losers and buy winners.
- Investors collect big returns for time spent managing their portfolio.
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Wealth Building Portfolio Management lessons:
Introduction to portfolio management Lesson 1
Pyramid portfolio wealth building Lesson 2
How investors buy dips Lesson 3
Distracted investing misses profits Lesson 4
Investors never average down Lesson 5
Market patterns repeat repeat repeat Lesson 6
Research confirms investment counts matter Lesson 7
Portfolio measurements to size positions Lesson 8
Growth protects investing profits Lesson 9
Winston Churchill said crisis = opportunity Lesson 10
Weeding your investment portfolio Lesson 11
Next lesson 5:
Investors never average down
Have a prosperous investor day!
Bryan
White Top Investor
[email protected] WhiteTopInvestor.com
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