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Loser's blues

Whether investors blame brokers, the market or themselves, watching stock prices sink is painful. Yet many people hang on to their worst-performing stocks.

By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times
published September 22, 2002

Sam Lasley knows all about investment regrets.

If only he'd never heard of AOL Time Warner. The Clearwater retiree said his broker recommended the stock, and he researched it himself.

"They seemed to have numbers that were encouraging, and they looked like they were going to appreciate," he said. "I thought, "I just can't pass this up.' "

Lasley, 71, bought 1,000 shares of AOL Time Warner between December and April. He paid as much as $40.58 per share on the way up, then bought more on the way down. Now, with the stock trading around $13 a share, Lasley has lost -- on paper -- $17,000 of his original $30,000 investment.

The same broker recommended Tyco International. Lasley paid as much as $57.24 for those shares, adding to his holdings as the price fell. In the process, he managed to wipe out half his $22,000 investment. While he complained bitterly to his broker about the bad picks, Lasley said he faults himself for taking the broker's advice.

"I blame my own stupidity," he said. "Unfortunately, it wasn't buying on dips; it was a long slippery slope."

With the stock market headed for its third down year in a row, investors everywhere are kicking themselves over stocks they bought and wish they hadn't as well as stocks they failed to sell and wish they had.

"If we all had crystal balls, we'd all be a lot happier," Sarasota financial planner Margery Schiller said.

Regret has moved front and center in investor emotions, and it's affecting not only how people feel but how they act in the markets.

Experts in investor behavior say our emotions play a big role when we are deciding how or even whether to invest. When the bull market was rolling, investors were feeling confident, in many cases too confident for their own good. That overconfidence led to more frequent trading and aggressive bets on highly speculative stocks.

"When we're in a good mood, we're very optimistic," said John Nofsinger, author of How Psychology Affects Your Investing and a finance professor at Washington State University. "One of the problems with being optimistic as an investor is that we often succumb to feel-good stories about a company or its products. Instead of being critical and analyzing the numbers, we have a tendency to say "Wow, that's a neat idea. I think I'll buy the company.' "

Now the psychology is working in reverse. Regret-filled investors are sitting on the sidelines, hanging on to their losers. To keep from being reminded of their failures, some have stopped checking stock prices online or in the newspaper. Many have turned off CNBC, sending the business network's ratings down sharply from a year ago.

"We like to feel pride; we like to feel that we've done a good thing," Nofsinger said. "If we're making money, we get to feel good about ourselves, so we'll have a lot of attention on investing and trading. But if we constantly have our attention on investing and it's emotionally painful, we're not going to want to put so much attention on that."

Academic researchers say investors sell winners far more readily than losers even though their portfolios suffer as a result. They would be better off taking the opposite approach, said Terrance Odean, a professor at the University of California, Berkeley, who studied the activity in 10,000 accounts at a discount brokerage.

"The winning investments that investors choose to sell continue in subsequent months to outperform the losers they keep," he said.

But picking a winner is never a certainty, and other studies show investors would rather miss out on a potential gain than take the same size loss. Selling a loser means admitting your mistake, locking in your loss and eliminating even the remote possibility of a comeback.

And if a stock has fallen substantially, the cost of holding is often modest when compared to the cost of the initial investment.

"I bought 300 shares of Elcom International at $4 each three years ago and watched it skyrocket during the tech heyday to $36 a share," said Jeff Friedman, 32, a Palm Harbor investor. "Then I watched it trickle all the way back down to today's price of 55 cents. It bothers me more than my other holdings that are down because I don't believe it will ever relive its glory days, but it's too cheap to sell."

Although most of the other stocks in his portfolio are winners and might be more productive places to put his money to work, Clearwater investor Lasley is still holding onto his AOL Time Warner and Tyco shares.

"How much lower can they go?" he asks.

Sometimes holding actually does pay off.

Largo investor Barbara Miller, 67, said she rejected her broker's advice to sell all her stocks at the end of July, and she's glad she did. The August rally allowed her to recover a small part of her losses, although her portfolio is still worth less than half what it was at the beginning of last year.

"I regret ever listening to my broker," she said. "His timing is awful."

But as the bear market stretches into its third year, it is becoming increasingly difficult for investors to hold their ground.

Palm Harbor investor Robert Mitchell, 48, said he hasn't given up on his belief that technology is the place to invest for the future.

"My only question now is whether we can hold on long enough for this downturn to pass before needing to cash out," he said. The money is supposed to pay for college for his two teenage daughters.

Other investors say their regrets have forced them to change their approach to investing.

"I am going to continue to buy on dips, but I'm going to be a little bit more conservative," said Lasley, who considers himself an active trader. He's also thinking about switching brokers. "Nothing my broker has recommended has done well in the last 12 months."

Tampa investor Jason Malouf, 24, said he has stopped counting on stock funds to make money for him.

"My whole theory on money changed," he said. "I'm putting everything into real estate now." Malouf, a mortgage broker, said he is buying rental properties.

Largo investor Barbara Fletcher, 70, was a buy-and-hold investor when she stashed some of the money she earned teaching line dancing into an individual retirement account invested in a growth mutual fund.

"The fund grew and grew," she said. "At one time my investment of $4,755 was worth $14,629." Today, it's worth a little more than $5,000, and Fletcher has changed her tune.

"I believe my gleeful greed in watching the investment grow cost me my profit," she said. "My newfound discipline is to try to observe the buy-low, sell-high theory, by selling once the investment has doubled."

Nofsinger, the author, says Fletcher has the right idea.

"If you want to get emotion out of your investing decisions, you have to come up with a more mechanical process," he said. "One way is to choose an asset allocation, rebalance your portfolio once a year and stay away from it the rest of the time. That's not sexy, but it's effective."

But Nofsinger said even he has difficulty doing that.

"I also got caught up in buying companies that really had no business even being companies," he said. "I bought some that in retrospect, if I had really done an analysis, I could easily have seen that this company is not going to have any profits in the near future, and maybe never, and probably shouldn't even be public yet. In a couple I got out in time and made money. In others I didn't and lost all the money."

He said the regret many investors feel will influence their attitudes about investing for many years to come.

"People are very significantly shaped by their experiences," he said. "People who lived through the Great Depression were extremely conservative for the rest of their lives in investing. Those whose experience began in the early '90s will want to get back in the market. But those who have just a very short experience, starting in the late '90s, will be harder to tempt back in."

The longer you have been investing, the more ups and downs you have experienced, making it easier to see the bigger picture.

St. Petersburg retiree Bob Becker, 75, said he finds comfort in the fact that although his portfolio is down this year, it's still worth twice what it was 10 years ago. And he notes that he has been withdrawing between $10,000 and $11,000 a year for the past three years.

"I'll just leave my money as it is and ride this out," he said. "I have no regrets at all."

-- Helen Huntley can be reached at or (727) 893-8230.

Emotional investments

Here are some common emotions that influence investing, according to experts on investor behavior:

Denial: Never looks up stock prices. Stuffs brokerage statements in drawer unopened.

Regret: Hangs on to losers, even when they're on track for bankruptcy.

Fear: Avoids stocks entirely or bails out when the going gets tough.

Pride: Leads to overconfidence on the way up, denial on the way down.

Desperation: Tries to make up losses quickly by investing aggressively.

Greed: Chases hot stocks. Trades frequently. Doesn't bother with research.

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