How Emotion Lost Me 100%

Emotion – it’s a savvy investors worst enemy, let it seep into your decision making and you’re going to end up hurt. Emotion and misplaced faith in a company are what lost me 100% of my investment. So far my worst investment yet.

It was about a year into my dabbling in the stock market, so far I had purchased only large NZX50 companies such as Summerset, Air New Zealand, and Chorus. They all turned out to be solid investments and reasonably safe. People are always going to get old. The airline is majority government-owned, meaning it being allowed to completely flop is unlikely, and is actually good to fly with unlike many of its counterparts. The latter has a near monopoly on copper broadband lines and fibre optics throughout the country. Despite some downs, they always came back up.

On the back of nice dividend payments and some solid share price growth I decided it was time to get a tad riskier, I singled out some smaller cap NZ tech companies. Diligent Board Members and Wynyard being my two favourites. I did my due diligence, familiarised myself with their products, looked through their returns, and read up on their board members. In the end, I found Wynyard to be the more enticing pick, I just loved their product – It had an MI5, James Bond feel to it. A cybercrime, anti-human trafficking and fraud-fighting software – it was sexy, and that’s what caught me out.

Diligent’s product, a board meeting management software, was a lot more boring but if I would have taken my emotive response to the product out of the process I would have likely seen that their product was more viable and had a stronger backing. Instead, I jumped head first into Wynyard, their share price had been climbing recently and I was scared of missing out on any future gains. I managed to buy in at was the near peak, a pricy $2.80 per share.

Fast forward a few months and the shares had faced a steady decline sitting somewhere around $2.20. I should have seen the writing when after missing their 2014 revenue targets opened a capital raising round with shares priced at a heavily discounted $1.79 each. But I held on, I hadn’t chosen wrong, they had a sexy product and a cool company surely they would succeed. But no down went the price further, the NZX Wynyard had already hit one iceberg, but loyally I stayed on board. Then came the second much larger iceberg, the net loss had doubled its share price now at 80c. This would have been the time to haul ass into a lifeboat and paddle away nursing my burses, but again loyally and emotionally I refused to admit I had made a bad call.

On we sailed taking on water worse than the Wahine. The final blow was delivered by the now obviously incompetent board. Instead of going forward with seeking capital from “strategic investors” the company announced another capital raising round, again heavily discounted. The share price plummeted, now sitting at .21c, trading on shares was suspended and eight days later the company was in administration, full capsize had occurred. Although my shares are still worth .21c, with the company now in receivership there is no chance I will see even the slightest return on my principal.

So lessons – First just because a product is sexy doesn’t make it successful, in all ways possible be as rational as you can when choosing where to invest your money. Secondly, we make mistakes, you can’t pick a winner every time and if the ship is sinking it’s better to get off with 50% of your principal compared to nothing. Don’t let your ego or love of the company stop you from cutting your losses and running. This bruising defeat has, in turn, forced me to rethink how I invest and I now place trailing stop losses under all my stocks, they are different for every market and take into account each market’s volatility, but they force me out when I otherwise might hold on.

Remember, as wisely stated by Warren Buffet:

Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

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