Listen up, because this is an important lesson that I and many other investors learned the hard way. Let me save you the trouble:
Never fall in love with a company or its stock.
When it comes to getting rich in stocks, emotions must be checked at the door. Get emotional about your family, friends, pets or your favorite sports teams, but not about a company.
I’ve written extensively about this in my two books, Stop Losing Money Today and Baby Boomer Investing: Where do we go from here? I talk about it when I give speeches, and I preach about it any chance I get to save investors from making a big mistake.
Now I want to share it with you because two American giants, in which millions of investors have an emotional investment, have hit hard times. Let’s talk about them for a moment. Then I’ll tell you how I learned this valuable lesson and put it to use for every single stock I own or recommend to my GameChangers readers.
Heart Over Head
The last couple of weeks have been sad ones for an icon of the past 50 years—General Motors (NYSE: GM). This week, it announced that auto sales in May fell 30%. Last week, the stock hit a 26-year low of $16.87.
Think about that. GM is back where it was in 1982! In November of that year, the Dow hit an all-time high of 1,065. It’s now at 12,500 – more than 1,000% higher! – while GM is stuck in neutral.
Sadly, a lot of investors have lost money because they love this company. In addition to its long, rich history, GM’s line up of cars – from the Cadillac Escalade to the Chevrolet Corvette – has some pretty slick machines in it that can get the heart pumping. Unfortunately, they just can’t sell enough of them to turn a profit.
For some perspective, GM and Toyota run first and second worldwide for most cars and trucks sold in a year. Last year, Toyota beat out GM by a few thousand vehicles, although both sold over 9 million.
By that standard, you would think the two companies are equally good investments. Not even close. Here’s how the stock market views them: GM has a market capitalization of $9.8 billion, while Toyota’s is 15 times larger at $156 billion!
The difference? GM has steadily lost market share and seen its profits shrink as it fights to hang on to its once dominant position atop the auto industry. Toyota, on the other hand, has been gaining fast in the rearview mirror and is now in the passing lane making its move. Pretty soon, GM will be staring at Toyota’s red tail lights.
The second icon that has gone nowhere for investors is General Electric (NYSE: GE), which we’ve talked about before. GE touches our lives almost every day with its appliances (this division is up for sale) to its light bulbs to its GE Finance unit to its NBC Universal division. It was also a stalwart investment for previous generations. In fact, a lot of folks have received GE stock from parents and grandparents, so there is quite a bit of emotion invested in this company as well.
Unfortuantely, warm fuzzy feelings don’t move stocks. The same day GM was hitting a 26-year low, GE hit a 52-week low of $30.21. Since Jeffrey Immelt took over as CEO after the legendary Jack Welch in 2001, the stock has been a total disappointment, down nearly 25%.
And yet, millions of shareholders have patiently waited for the turnaround, thinking more with their hearts than with their heads.
No More Mr. Nice Guy
Believe me, I know. I’ve been there myself. Right around the turn of the century, I got burned badly by a company that I was emotionally attached to. I admit it: My judgment was clouded by the strong relationship I had with the CEO and the CFO.
I saw some signs pointing to possible trouble, but I chose to ignore them. Instead, I listened to my heart, which really liked these two gentlemen and I hoped – more than believed – that they would turn things around.
I learned from my mistake. I will never, ever fall in love with a company again.
Sure, I may love my Apple iPod and iPhone, which are incredible products that my family and I use every day. But as an investor, I look at all kinds of numbers from Apple with a cold, calculating eye. I’ve learned to separate my emotional attachment to a company’s product or services and look hard at what’s important to the stocks’ profit potential, like its growth rate and other pertinent metrics.
It’s no more Mr. Nice Guy when it comes to making money for myself or my readers. Apple and every other company have to hit certain criteria to remain a GameChanger. (It has, and we’re up 50% so far. Get my most recent advice here.)
No exceptions. Ever.
Held to a Higher Standard
At GameChangers, each and every company I recommend is indeed changing the game in its sector. These companies will outperform their respective peer groups because they have the best products and charge premium prices for them; they have sustainable operating margins; they have top-notch management; and their innovation allows them to continue changing the game for a long time.
In other words, these companies are the standard-bearers, and as such, they better perform like one. No matter how much potential I see, if they don’t meet my criteria – regardless of how much I may like the products or management – then I don’t want your hard-earned money investing in the stock.
The reverse is also true, especially if the Street is missing what’s really going on. When our nuclear plant builder reported earnings a few weeks ago, the stock didn’t really move. Numbers came in a little below expectations, but I was thrilled with the progress I saw in the company’s key growth driver. That was the performance I wanted to see.
Add in the recent news about nuclear plants being built in the U.S., and the stock is up more than 30% in less than four weeks. (Find out more.)
I’m all for being a nice guy, but not when it comes to making money from stocks.