Falling in love with a stock can cost you dear
Occasionally, you find a stock that you just don't want to let go of, despite all the logic telling you to get out. But if a stock isn't generating cash-flow, it may be time to reconsider your loyalty, says Bengt Saelensminde.
When Andy's number came up on the screen, I knew exactly why he was on the line: He was phoning for a gloat.
"Whatever you do, don't sell. This is gonna be bigger than Microsoft" he yelled down the line. I guessed he was up another £10k that morning.
This was back in late 1999, and we wereall making packets trading tech stocks. Yes it was a bubble and the majority of those sorts of stocks were built on hot air. But when prices are soaring it's a great time to be in the market. And maybe I'd have been urging you to join the party too.
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The fatal mistake
But some traders made the mistake of giving their hearts to those beloved tech stocks. Even when every logical reason to get out was screaming at them, they hung on while the market crashed around them.
Bank balances were broken, as well as hearts. And this is a lesson we can all learn from. You see, it can be really hard not to fall in love with a stock. It may be making the most wonderful products that send your heart aflutter. You may have doubled your money and you're now looking forward to a long and beautiful relationship with the wonder-stock.
But these relationships have a nasty habit of ending in acrimony. Take the stock that had Andy so excited back in '99. The stock in question was NXT and memories came flooding back when I saw them mentioned in the paper the other day.
Don't get suckered in like this
NXT wasn't the stock's name back in the old days. They started off as Mission electronics and had made a name for themselves in speakers and amplifiers. The shares traded around the £3 or £4 for several years.
But then something really quite exciting happened. They discovered a new technology to make speakers as thin as card. In fact, they could make them out of card, or onto car windscreens or computer monitors, practically anything. No more heavy, expensive and clunky traditional speakers.
Well, you can imagine the excitement. Surely every man, woman and child on the globe would end up with their products - perhaps loads of them for each person.
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And then it all went wrong
NXT (as they became) had spent millions patenting all manner of products and getting some into production. Management sold off the core electronics business to focus everything on flat panel speakers. All their eggs were shoe-horned into one basket.
But nobody spotted the reality. Nobody cared that the company didn't generate any cash from this new line of business. It was all jam tomorrow. But that didn't matter for those of us lucky enough to be making thousands on the run-up in the share price.
But try as they might, NXT found it difficult to change the habits of industry. Come 2001, the tech markets had crashed, pushing economies into recession. Barely anyone was spending on innovation.
They got some sign-ups and some products into production, but it all took forever to achieve and never delivered the numbers anticipated. What's more, all the legal work for world-wide patents was costing a fortune and sinking the business further and further into the red.
Having a wonderful story, doesn't mean it's a winner. Winners convert the story into cash-flow. And it's cash-flow we need to fall in love with, not stories.
Today, you can buy NXT for around 11p, that's quite a way off its £24 high!
In 2001 it became obvious that NXT wasn't going to make enough sales. They were running out of cash and Andy should have known it was time to cash in for a respectable profit. Hanging on for the love of the story was a costly mistake for my friend Andy.
Never fall in love again
Of course, being human, we fall in love again and again. Burt Bacharach sums it up in 'I'll never fall in love again' after telling us in no uncertain terms why love is the most ill-conceived of notions he delivers the killer punch
"So for at least until tomorrow,
I'll never fall in love again"
Yes, it's true, despite my cynicism, I continue to fall for stocks again and again. The temptation to follow a stock with your heart rather than your head can be almost impossible to resist. But the rule I follow now is that it's better to dump than be dumped.
I always take management's statements as ideas rather than truths and I'm ready to dump them if the news-flow doesn't convert to cash-flow.
Remember, emotional attachment makes you do irrational things. Andno oneis immune from the pull of a great story. Not even the most successful pro. The trick is to understand that we all have this flaw and to have the strength to dump them before they do serious damage to your portfolio.
So have a think about your portfolio. Are you holding any stocks for 'the love of it', stocks with a great story, but little in the way of cash-flow?
If so, it may be time to reconsider your loyalty.
This article was first published in the free investment email The Right Side.
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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.