Terminal or Turnaround?
Ian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Until the beginning of 2012, my own business had first call on both my time and available capital. I recently sold that business and I am building a portfolio to eventually see me through retirement.
So far, I am generally doing well. But I have to admit that amongst the winners I have also managed to pick a few stinkers. Deciding what to do with these is a common problem for all investors.
The game changer that ran out of fuel
My first non-optimal choice was Ceres Power (LSE: CRW) – a company listed in London that was going to revolutionize the domestic energy market with a small fuel cell. In September 2012 the company failed to raise additional capital and announced that it was planning to wind up. The shares lost 85% of their value.
I decided that the investment thesis was broken and sold at a loss. Now, new investors are on board trying to revive this corpse. If I had held on I could have recouped most of my loss. But I am happy with my decision. I had no way of seeing the future, and at the time an 85% loss was better than a 100% loss.
The ETF innovator
Another of my investments headed for losses was Wisdom Tree Investments (NASDAQ: WETF). The company is looking to disrupt the ETF market by producing innovative funds that are better targeted than traditional index funds.
I bought the stock at $8.33 in March 2012 and watched it sink to $5.95 in December. At that point I considered whether my investment thesis had changed, and I read the coverage on the general Fool site and on my paid services. On the basis that nothing had changed, I decided to hold the stock and considered adding more. The stock was held in a funds-limited ISA account (a UK tax shelter). As it was not one of my strategic holdings, I decided against either selling another stock to add more, or starting a separate position in another account.
In 2013 the Japanese market started rising and Wisdom Tree’s hedged Japanese fund suddenly became popular. The share price recovered and has since marched on to highs of $13.85 at one point, settling back to $11.78 at the time of writing – a gain of over 40%.
I see a bright future for this disruptive stock. I’m very happy that I held my nerve when the price was sinking and somewhat wistful about my decision not to add below $6.
The natural gas revolution
In March 2012 Westport Innovations (NASDAQ: WPRT) was at $46.11 and taking off. Westport produces natural gas engines for trucks, heavy plant and railway engines. It is at the forefront of a game changing revolution and I had to get in quick! Naturally, as soon as I invested the stock immediately started tanking.
When the stock hit $39, I thought my luck was in. I had a chance to buy more of this great stock at a cheap price, so I bought at $39.23. The stock plummeted hitting $22.55 in May 2012.
Peter Lynch advises, “Don’t try to catch a falling knife”. Exactly the mistake that I made when I bought Westport at $39 - I should have waited. But since then I have purchased additional positions at $26.87, $34.17, $25.10 and $29.54. “Why?” you may ask, “the stock is a proven loser”.
Warren Buffet’s investing style is to make big bets on a small number of stocks. He also likes to buy stocks that are ‘on sale’ and he will buy when the price falls, then buy more when the price falls further.
I have to admit, I’m no Buffet, but I do like to follow a similar strategy. I see Westport as a business that is uniquely placed to make large gains as a sea change takes place in the transport industry. It’s one of my major strategic bets, and throughout this period of depressed price I have kept building my position.
The date that didn’t work out
When David Kuo of Motley Fool UK tipped online dating agency Cupid (LSE: CUP) on a UK TV show, I started a position. Following accusations in the press that company employees were impersonating potential partners to lure prospective members, the shares fell by 60%.
As this was not a financial scandal, I held awaiting facts. An independent report has now cleared the company of fakery, but highlighted deficiencies in standards. The company promises to address these issues.
The share price has now recovered a little, and I am hopeful to eventually move into profit.
The failed operation
When MAKO Surgical (NASDAQ: MAKO) shares fell by 40% on a poor quarter, I saw a buying opportunity. Peter Lynch says that one of the silliest things that people say about stocks is, “If it’s gone down this much already it can’t go much lower”. Lynch was proved right again when it fell another 40% on the next quarter.
I put the position on hold and waited. Lately, the company has restructured the sales operation and has shown some signs of a business improvement. I have made a small addition to my position, hoping to gain as the price rises.
The bottom line
As is often in life, I think I’ve learned more from my failures than from my successes. In particular, don’t ignore the wise words of Peter Lynch!
To summarize my approach to a failing investment:
- If the investment thesis is broken – sell
- If the original reason to buy is intact – wait, evaluate and decide whether the business can recover
- If the business passes the test, consider using the opportunity to add at a lower price
- Keep monitoring the patient until normal health is restored
- Always decide based on business fundamentals – not price movement
Ian Richards owns shares of MAKO Surgical , Westport Innovations, WisdomTree Investments, and Cupid. The Motley Fool recommends MAKO Surgical , Westport Innovations, and WisdomTree Investments. The Motley Fool owns shares of Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!