GE’s Crash Holds An Important Lesson About InvestingMauldin Economics
The main problem with most investors is that they have a very small imagination.
GE is a single-digit midget. Who could have predicted that?
Bankrupt? A stock that was in the Dow for 100 years?
Yes, bankrupt. Option prices suggest a probability of about 2–3% that GE will go down for the dirtnap.
In finance, good things tend to get better, and bad things tend to get worse. Turnarounds are exceedingly rare. And trend followers know this.
Everyone loves an underdog, but it is a terrible investment strategy.
Sell Before It Goes to Zero
Some of you are probably holding onto GE. You think it is temporarily mispriced and will soon shoot up.
GE has a lot of debt, and is furiously trying to sell assets. But it may not be able to move quickly enough.
A few weeks ago, I talked about portfolios and rebalancing. I talked about people whose portfolios were dominated by one stock that had grown to the sky.
Well, the opposite can happen, too.
One of your stocks can go to zero. If you have a portfolio of 10 stocks, each at a 10% weight, and one of them goes to zero, it will be hard to have a good year.
So the idea is to sell before it gets to zero. But in reality, it is not so easy to sell a stock like GE at $8.
It is even harder to sell it at $2. But selling at $2 is way better than watching it go to zero.
I’m not sure if there is a name for this phenomenon, where it gets harder to sell something on the way down.
Endowment effect, maybe, but maybe not. Either way, we don’t need a name for it.
Don’t fall into this trap.
AT&T Could Be Next
Speaking of stocks that are in trouble, some people started pointing fingers at AT&T.
(Full disclosure: I own a small amount of AT&T. I have held it in a UGMA account since I was literally eight years old. A widow-and-orphan stock, and I was an orphan. It’s not much. Now I am thinking of launching it.)
Anyway, AT&T has $181 billion in debt. It’s easily the most indebted company in the US (and possibly the world), adding lots of it with its recent misadventures into media and entertainment.
The stock yields 6.5%. And I’m sure some people think that’s a great dividend yield.
Actually, that is not a great dividend yield. Usually when a stock yields over 6% (unless it is a REIT or a tobacco stock), it means trouble.
So this is how the story goes.
There is a lot of corporate debt out there. And if the credit markets get funky, people will go after AT&T first.
I assure you that will happen.
My prediction is that AT&T will one day be in the same predicament as GE. That dividend yield is not so safe—they will have to cut it to make interest payments on the bonds.
But that will not be enough, and asset sales are next. Hard to pay back $181 billion in debt.
Heaven forbid AT&T ever gets cut to junk. That will be a day to remember in bond market history.
Use your freaking imagination. If I told you even a year ago that GE and AT&T could cease to exist, you would have said no waaaaaay. Way. Throw in Sears and some other old-line retailers, too.
It is an achievement for a company to last 100 years. It is hard to last much longer than that.
Here’s the Lesson
The lesson here isn’t to dive into your brokerage account and sell your own stocks. The lesson here is that you should exercise a little brainpower and long-term thinking.
I spend a lot of time telling people not to fool around with dumb stuff like Bitcoin and pot. It’s also worth telling people not to screw around with stocks that are like an anvil on a glide path.
People don’t sell these stocks because they are afraid that they’ll sell the low and the stocks will pop back up. They are trying to minimize regret. It’s probably not the low.
If we have a bear market and a recession, there will be more stories like this.
Actually, the worst part about owning a stock that goes to zero is that it then goes to the Pink Sheets. At that point you won’t be able to trade it. It just sits in your brokerage account and mocks you when you pull up the screen.
Then it really will be pointless to sell it, because you’ll get something like a dollar.
I like to make fun of trend followers, because they say things like, “I buy the stocks that go up, and sell the stocks that go down.”
Trend followers are simpletons. But there is a weird sort of wisdom in a statement like that. You really should sell the stocks that go down.
I’m a proponent of not staring at your portfolio on a daily basis, but I recommend checking in fairly regularly to make sure everything is okay.
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Article By Jared Dillian, Mauldin Economics