Virtually all investors have some losers in their portfolio. Benj certainly does. Every year he usually sells one or three, but even then, others are sitting in the portfolio not doing much except looking plug ugly. Rather, he keeps reporting gains on profitable sales to the tax authorities and they keep taking their pound of flesh, without so much as a “thank you.”
But this year he has decided that the time has come to get rid of some of the flailing elders that he owns. As investors can go back up to three years to claim their losers against gains, he can potentially offset some old wins – depending on how big his winners are this year.
One rule that he normally abides by is not selling any duds that have been held for less than two years unless it is quite obvious that a recovery is exceptionally unlikely. He would prefer to wait and give the potential turnarounds a longer period of time to germinate. Of course, that might simply be too optimistic a hope. And when looking at how to pay the government less by culling losers, simple optimism is not helpful. A dose of harsh reality and ruthless execution is in order.
So here are a couple that he is strongly considering offing well before the end of the year and were written about in this newspaper. Waiting until December when most people are rushing their also-rans out the door makes little sense from this angle. The increased supply affects the price to the downside and in these cases, there is already enough negativity baked into the stock prices.
The first he is looking at potentially booting is GSE Systems Inc. GVP-Q. A key component of their operations is providing staffing and simulation software to the power industry, primarily nuclear. It has been around since 1971 and for a long time it was fairly successful. Not so in recent years, despite a revival in nuclear power. Benj tried to sell it earlier but only a tad went out the door. Thus, the rest that he bought about a decade ago at US$1.31 remains. It’s currently trading at about US$2.40, but alas, that does not take into account the 1-10 reverse split done last year. Usually when one of those is announced, Benj sells the stock pronto, as the vast majority of stocks that split drop swiftly after the consolidation.
Why did he not sell here? Stubbornness? Stupidity? Tough to know exactly, but he should have stuck to his regimen of selling quickly when a stock consolidation is going to happen. As he wrote in his best-seller, The Uncommon Investor: A a contrarian’s guide to investing in the stock market: “Without discipline, you have no method.” Those six words covered a whole page. He still kicks himself for not following his own directive. Thankfully though, he did not sell recently as the stock has doubled this month.
Another stock that we wrote about in this column, a year ago in fact, was Gold Resource GORO-A, acquired by Benj at US$2.66. He opined how he was sticking with the company because of confidence in chief executive Alan Palmiere. Perhaps the positivity was misplaced or maybe the odds were simply too stacked against this company. Either way, a big loss is in the works as it now trades at about 25 U.S. cents and the major question is when and at what price the loss will be swallowed.
There are some other failures in the portfolio unfortunately. These include Air Industries Group AIRI-A, Blackberry BB-T, on which he made a lot of money on a partial sale, but the remainder sits in the red, Caesarstone CSTE-Q and Datametrex DM-X. For various reasons, he will hold on to all of these for the time being. Offsetting these were many winners, which is why the portfolio had a 19.1-per-cent 10-year annualized return.
Selling losers is psychologically negative. The only conclusion that can be reached is that mistakes have been made and one is not perfect. For many people, it is not easy to admit fallibility.
A key thing when dumping failures is to analyze what went wrong. Each position will likely have at least one lesson that can be drawn, if not numerous. Hopefully the schooling will help one avoid making similar mistakes in the future. It is better to flush money down the toilet with a learning experience, rather than to wave goodbye while learning nothing. And remember: don’t fall in love with a stock – it will not love you back.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter