This article is part of the series: “How to invest? Words of advice for my sons”, by Lyubomir Lekov, founder of INVESTOR.BG and LEKOVI Foundation
Everyone who invests in a portfolio knows having losing positions is a matter of course. The real problem is not in the losing itself but in the type of decisions we are going to make in the consequence of the prices’ decline. We have our minds set in a way that makes the loss a lot more influential than the win.
So when Mark Barton from Bloomberg asked the following question at the Investor Forex Forum it surely raised some strange emotions in me.
“What are your losing positions in 2014 and what did you learn from this?”, he asked.
It was my turn to answer and surprisingly I couldn’t remember the name of my top losing position this year – Westport Innovation, although I often take a look at its stocks value.
The company owns a revolutionary technology which allows engines to run on natural gas. This year, however, was very unfavorable so the stocks have lost 76% of their value since January.
My approach includes investments in numerous companies. When the portfolio was first created, the stocks of Westport Innovation had approximately 2% share in it but because of the huge loss in their value this year and the increase of the other positions’ value, the total share of this stock is only 0.22% at the end of November. It means that a possible bankruptcy will lead to an additional loss of 0.22% of the whole portfolio.
3D Systems Corporation is another losing position in my portfolio. The company is a leader in the integrated solutions for 3D printing but since the beginning of the year it has lost 62% of its value. Before that it marked a 100% rise for the last 5 months of 2013. Looking at positions while they mark huge rise followed by a huge decline makes the investment in shares really difficult for a lot of people.
3D Systems slowed down its income growth which caused the investors to sell it out. However, things are looking good for the company in the long term perspective – the company is a leader in a sector which will mark a huge rise in the next 10-20 years. It has a 1.38% share in my portfolio which makes this position relatively risky for its profitability especially in case the company loses the leading position in this new industry.
Sodastream International (leader in the so called “Make a home carbonation product” segment) also marked a 56% loss in its shares. The company has a 0.23% share in my portfolio. Its position is a typical example of a hasty purchase as a consequence of a very promising analysis conducted by an institution which I usually trust. On the other hand, the same analysts are now warning for the vague future of Sodastream if the company doesn’t rediscover itself. In short, the investors are not very fond of the company and no one knows what the future holds for it.
Atwood Oceanics marked 40% loss since the beginning of the year, having a 0.42% share in my portfolio. The price declined because of the expectations for a decline of the investments in oil drilling technologies because of the drastic drop in the oil prices. The shares lost 30% in the last two months only. Westport Innovation lost 60% of its value in the same period of time (two months) due to the same reason.
The common thing between Westport Innovation, 3D Systems, Sodastream and Atwood Oceanics is the fact that they operate in sectors which are performing badly in 2014, in general.
In addition, these are industries relatively unknown for me and I have less knowledge and experience for them comparing to the IT companies, for example.
Some years ago I was often selling my losing positions using the principle of the professional investors – “hold the winning and get rid of the losing ones”. However, I don’t think this is a sensible approach in this case because the four companies still have good long-term perspectives, i. e. they can overcome the current problems. Additionally, so far their share in the portfolio is relatively small and even if one of them breaks up, this will have an insignificant effect on it.
The strategy of investing in 60 companies (right now the ratio of winning and losing is 44:16 in favor of the winning) is so far yielding good results. This strategy is designed to make a single positions have a minimal effect on the portfolio’s profitability.
The large diversification, though, led me to the decision to invest in companies which I know little about.