1/31/2014 12:30 AM ET|
When a giant gain causes pain
If you have a small amount of money invested in a company, you own the stock. But if that stake suddenly grows enormous, the stock can own you.
Succeeding as an investor takes a strong mind, but a stronger heart. That is especially true when stocks plunge—or soar.
In his letter this week to investors in his hedge funds, manager David Einhorn of Greenlight Capital pointed to "the parabolic rise of a growing number of market-leading story stocks."
If you have explosive gains on stocks like Netflix (NFLX) (up 163 percent over the past 12 months), Fannie Mae (FNMA) (up 968 percent over the same period) or Priceline.com (PCLN) (up 74 percent), it isn't just time to reassess what you are investing in. It is time to reassess what kind of investor you are.
For proof, look no further than the remarkable story of Ross Miller and Mary O'Keeffe, a married couple who took a wild ride on a supersonic stock.
Miller, who died last May at age 59, was a professor of finance at the State University of New York in Albany. Every year, he had his classes analyze and track a stock in the news. But, says O'Keeffe, Miller never bought any of them, investing exclusively in diversified index funds -- until last February, when that semester's stock caught his fancy.
It was Tesla Motors (TSLA), the manufacturer of electric cars, which he bought at around $38 a share.
The stock doubled in the next three months. Then Miller bought call options on Tesla -- bets on a further rise in price that made roughly $30,000 in one week, according to O'Keeffe.
Early last May, Miller said to her, "I have something to confess to you." He had kept the options trade a secret from his wife. "I was so relieved that was what he was confessing," she says.
Decades earlier, as a young professor at the California Institute of Technology, Miller had become addicted to options trading, in which even small price movements can produce big gains or losses. "He made some money, then lost it all," O'Keeffe recalls. Miller then made a written commitment never to trade options again, placing the couple's two favorite stuffed animals next to the pledge and having them "witness" it.
So Miller felt the need to confess last year because he had violated one of his own rules of self-control. "I gave him absolution," O'Keeffe says.
But the options were making Miller "stressed out," she recalls. So he sold them and told his wife that if Tesla hit $200 a share, he would consider selling the stock, too.
Ten days later, Miller died of sudden heart failure.
"Nothing prepared me for the sudden responsibility of managing this," says his widow. "By training and intellectual preparation I should have been qualified, but I was utterly unprepared for how difficult it would be emotionally."
O'Keeffe hadn't merely been married to a finance professor who pioneered a method for estimating the value that fund managers provide for their investors.
Like her husband, O'Keeffe earned a Ph.D. in economics at Harvard University. She had taught a course on financial management for nonprofits. She and Miller ran a consulting firm that advised companies on how to manage financial risks. O'Keeffe, now 60, is a professor of public finance and tax policy at Union College in Schenectady, N.Y.
But as Tesla "gyrated wildly up and down," she says, the stock was "too stressful to watch." She sold most of it at around $140 a share in August. After the stock went up to $194 and down again, she sold the last of her shares at around $130 in November.
Tesla was back above $180 this week, but O'Keeffe doesn't care. "I have no regrets," she says. "I'm so glad not to have to think about it anymore."
What happened to Miller and O'Keeffe isn't unusual, say experts in the psychology of investing.
If you have a small stake in a company, you own the stock. But if that stake suddenly grows enormous, the stock owns you. Thinking rationally about it then can become all but impossible -- even if you have a doctorate in economics.
No matter how closely you analyzed a stock when you bought it, if it has since gone way up, then it is time to start analyzing yourself, says Meir Statman, a professor of behavioral finance at Santa Clara University.
"What many people are afraid of when they have a stock with a big gain," he says, "is regret." So you need to figure out which will bother you more: selling the stock and then watching it go up even more, or not selling and then watching it go down.
To manage both kinds of regret on a highflying stock, consider selling, say, 20 percent in five equal installments at regular intervals. That reduces the risk of selling too soon and of holding too long. As Terrance Odean, a behavioral-finance professor at the University of California, Berkeley, puts it: "Investors should diversify emotionally as well as financially."
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VIDEO ON MSN MONEY
So let me get this right:
MSNBC, per "The Wall Street Journal" wants me to get all choked-up over a "Banking Executive" who jumped from a 33 story building because he was all upset over something he or the Banking Institution he worked for had done.
When that didn't have any effect on me, you write an article about a man who has a "Heart Attach" and dies because he was under so much stress over deciding whether or not to "Make a lot of Money" if he sells his stock or "Make a Great Deal of Money" if he sells his stock.
"My Brother" just had a "Stroke"
He was under so much pressure , because he was trying to figure out how he was going to pay his home mortgage, while paying for his daughters car and buying clothes for her kid , at the same time, he was trying to help keep his son sober enough to hold a job, and adding to this , he was taking care of his other grand-kids who were living with him because his son's first wife and her new boyfriend had moved with him, in his house, because they couldn't make enough money to get a place of their own.................So, If I Don't Get all teary eyed over this article.. Excuse me
I have a 8th grade education and have been paid for my education in the stock market over the last 14 years. I have found the limiting loss's on entry and gains is important, even if you get kicked out you can always re-enter on volatility or price action. No matter the price goes up or down. Its more about winning more than you lose and having patience/time to allow the market to benefit your portfolio. Day traders want it right now usually to generate income to live on and investors have time on there side to benefit from possible multi baggers. We are in a high growth era with economic benchmarks going through the roof and inflation on its heels. Riding the wave takes much less effort.
One consultant had said " if you don't like the price today wait till tomorrow it will change" I replied there will always be a tomorrow. If I or my limit order or Brackets buy/hold/or sell the stock position on any given day I will have another opportunity tomorrow.
Manage your portfolio don't let it manage you. happy trading
Always pick the bottom number and the top number on any stock you invest in... If it hits the top or bottom number, sell and walk away.... Dont continue looking at the price second guessing yourself.
If you dont, you'll end up just like the people in the article.
Investing is a business to make money... Treat it as such...
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