How it Feels to Lose 45% in One Evening

If you scroll down, oh, one post, you’ll see a long entry I made last week about the stock Crocs (CROX). I purchased the stock for my Covestor portfolio , and was up just about 15% on Wednesday. Not bad.

Then yesterday, the market had a bad day, and the stock was down about 8%. That’s alright though – it had been on a tear, up for a week straight by nearly 25%.

Just after four, one of the analysts that works here casually mentioned he saw on the news that CROX reduced their EPS forecast to 3 to 7 cents per share.

But I thought, that couldn’t be right. Weren’t they forecasting 42 to 47 cents?

As I saw the stock start to take a nose dive, I realized I was right, and that they had reduced their forecast by about 90%. Ouch.

So, after stomaching the pain and spending a bit longer than normal at the gym that evening, I wrote down the lessons learned:

Never put more than 20% of your portfolio in one stock. Had I been more heavily invested in this stock, I could have lost a huge portion of my portfolio.
Technical analysis is only one tool in the toolbox. I didn’t make any mistakes using technical analysis, but even the best TA in the world couldn’t have told me that the stock was about to cut their earnings forecast that much.
Don’t buy a stock if it violates several of your rules. I knew CROX was a risky play, because it didn’t meet several of the rules I use when buying a stock – especially when it came to community sentiment. Several of the community resources I use to screen stocks all hated CROX, and I thought I saw something that they didn’t. This showed me that I was horribly wrong.
Be wary of stocks priced less than ten dollars. There’s a reason why most investors avoid them: They’re dangerously volatile.

My Covestor portfolio is really hurting at this point, but if anything this has just fueled the fire for me to do better with it, and hopefully catch up to the performance of my main portfolio.

7 Comments so far

Ouch…..
I bet it was painful to write. Keep at it though, a good education is never cheap

How long will it take to learn lesson #5: invest in low-cost mutual funds instead of individual stocks. having a master’s degree, I’d think you’d appreciate the overwhelming evidence in academic studies demonstrating that stock-picking is a waste of time.

I did feel that way from the first books on investing that I read (Random Walk, Little Book of Common Sense Investing).

But then I went to wrote for a investment advisory service that had been investing in individual stocks for three decades, an over that three decades beat the averages by 7%. Last year all of their publications beat the averages, with one up 100%.

Seeing all of that with my own eyes really changed my perspective on the whole thing.

Also, I think you would at least recommend an index fund, considering how impossible it can be to pick winning mutual funds!

it is impossible to pick winning mutual funds. what we do know is that, on average, mutual fund returns will provide the market returns minus expenses. so the best mutual funds (over long periods of time, similar to one’s investing career) will be the ones with the lowest expense ratio. Fidelity and Vanguard index funds are good options here.

Jon, I know you’re all about picking stocks and that’s fine. But I have to ask, what were you thinking on a stock with 40% of its float sold short?

Well, I admit that a high short interest is usually a big sign that something is wrong with the stock. But the thing is that the stock had that high of a short interest when it rose from 30 to 75, and I was really able to benefit from that.

Stocks with high short interest usually do die a horrible death, but sometimes the short interest comes a little too soon.

Jon- I learned this the hard way, so take my advice – cut all losses at no more than 8% below your buy price. If you had placed a “trailing sell stop market” order at 8% below the price you bought it at, you would have been “stopped out” with a profit. While everyone else was panicking and reacting (or not reacting) emotionally to the “news”, you could have been sitting back and laughing as the price plummeted, content with your meager return as if you had won the lottery.

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