Dating Losers

Nov 02, 2018 | Sam Rook


Knowing when to walk away

                Contrary to the headline, this post has zero to do with romantic relationships; although it could probably apply there too! Losers are those picks that you make that just do not work out. You bought Bitcoin last December thinking it was going to change the world and now you are stuck with a loser. Bad decisions happen in all areas of your life. Knowing how to deal with them can make a huge difference to your long term success.


                This is my story of a recent loser called Maxar Technologies. Maxar is this wonderful Canadian aerospace technology company that has been around for years and yet you likely have never heard of them. You have heard of the Canadarm which is on the International Space Station and was on some of the space shuttles. That’s Maxar. You probably use Google Maps or Waze. A lot of that satellite imagery is from a Maxar built satellite. It’s not a company you know you know but you know it all the same.


                There is no need to get deeper into the history of Maxar technologies because I could tell this story of any position that ends up a loser. Maxar just happens to be fresh in my mind.


                Losers don’t suddenly go from Mr. Nice Guy to a loser overnight. The warning signs are there, we just choose to ignore them. The over-leveraged acquisition to fund growth prospects. The delays in getting approval for new government business. The share price dropping slowly and surely even in the face of apparent good news. Those are all things that happened to my loser and they are also all things I brushed off as “the market does not see it right, like I do”.


                I hope you had a nice chuckle at my own cognitive bias after railing against that exact behavioral issue all year. It’s ok, I can admit it when I am wrong. We should all be able to admit when we are wrong and change our minds. Of course we are not built to change our minds so doing it is harder than we think.


                What should I do in this instance? I have made a choice that has affected my clients negatively. My cognitive bias let me hold on to that decision in the face of evidence that I was wrong to the point that people lost money. Money they have worked hard and saved and trusted me to invest so they can enjoy it later in life. Well what I am going to do is fully roll out my Dating Losers strategy.


                Dating Losers means when the market is telling me I am wrong, I will see it in the relative performance of my pick versus the rest of their competitors. Maxar was going down while the other companies with business in satellites and space engineering were going up. That was a warning sign that I was with a loser. Sure you could be a contrarian to the market and find success but that is almost always AFTER the market has decided that stock is a bad investment.


                From now on, if a specific position is down 12% MORE than their competitors, they go into my Dating Losers pile. Clients can choose to stick with them (emotionally, losses in investing hurt twice as bad as gains feel good thus “taking a loss” is painful no matter the amount) but my advice is to dump them. You definitely do not want to marry a loser and be down 70% later on. It is my hope this will take away some of the troubles with my own cognitive biases (everyone has them) and allow me to do even better for my clients. Of course if everything is down the same, that is different. Equity investing involves some volatility and there will be weeks, months or years when things go down. My rule is specific to the split between a specific company and everyone else. Those are the issues I want to avoid.


                Famed Hedge Fund Investor, George Soros said it best; “I’m only rich because I know when I am wrong. I have survived by recognizing my mistakes.” Knowing when you have made a mistake is one of the keys to survival over the long term. Accepting the mistake, changing your methods and moving on from those bad choices will help limit your pain and improve the long term results. My process is changing because it needs to get better. Maxar has highlighted that and I think this is a great step forward to better returns for all of my clients.