Friday, October 17, 2014
All Around the Craps Table...
Anyway, what I am here to discuss is dumb betting. Because it happens all the time, both in casinos and real life. I am not just talking the people glued to a slot machine or the joker who bets on insurance at the blackjack table, because we all know that is a mistake. I am talking about chasing high yields and shaky companies.
As far as high yields go, I chased one and did not get burned. However, people get torched by these sorts of things all the time. A friend of mine bought some stock in a foreign company, the name escapes me, and told me he was banking a fat 10%+ dividend. Only to get smoked by it later as they slashed it and the share price fell heavily. He sold, recovered 80-90% of what he put in and that was that.
With shaky companies I have two good examples, one of me and one of another friend of mine. The one for me was when I was just starting out. I've worked in alternative energy (AE) a bit in my career so I figured I would buy some stock in it. At the time AE was hot in the news following on the heels of the massive bailout funding. The economy was in a slump, but my company was still installing AE at an impressive rate. So I bought some stock in CSUN. A Chinese solar PV manufacturer. Thank god I only spend $50, and sold it for $39 (includes commissions, ouch). News has come out recently CSUN might be done and their CEO just resigned. Over the past few years their stock has gone from $3 to almost $9 to now less than $3 per share. Really gambling on CSUN would have been quite a ride. The key here is how I screwed up; I did barely any research and I did not worry about dividends, ratios, or any other indicators of stability.
The second example I have is a friend who bought stock in Sony (SNY). SNY recently announced they were getting rid of their annual dividend, which was a paltry $0.26 per share to start. He got lucky and sold after they had some success with their recent PS4 platform release. If he had held onto it, there would be no annual thank you for owning and a recent loss in share price.
Each of these stories has a element of luck and not losing it all or very much. Still if you lose 80% of your money often, you eventually have nothing. Too often people put faith in companies, like dice and expect an outcome. Good investing avoids that and you bet on solid companies that deliver products and services that need to be use early and often. These are also good lessons in diversification. Even if each example was a bet on a blue chip stock, and they all fell apart you will likely still have 20 to 40 other stocks handling the load.
These are a big part of my investing strategy. I don't like getting torched by a fool, and neither do you. It happens sometimes, but if it is happening repeatedly what is the point? All this work is so one day I don't have to work, why extend the working period?
Side note, if you are going to throw the dice at craps, the least you can do is keep them on the table!
- Dividend Gremlin