Getting Back What’s Gone


“If only God would give me a clear sign! Like making a deposit in my name in a Swiss bank account.” Woody Allen


“Steve, I lost over $100,000 in Lucent,” Bill told me. “If I’d been following your advice two years ago, I’d still have most of that.”

Bill didn’t mean to lose over $100,000 in Lucent, of course. But the stock fell from $60 to $2 and Bill owned 2,000 shares, which means that Bill turned $120,000 into $4,000.

Like most investors, Bill pulled out all the excuses …

* “Oh, but it’s LUCENT,” he said … as if saying “Lucent” with emphasis gives it more esteem and helps the stock price rise.

* “It’ll come back,” he said. Really? But how do you know? People probably said the same about Enron, Kmart, and WorldCom, but they all exploded.

* “Selling it would be giving up,” he said. Yes, selling would mean that you are acknowledging you made a mistake. Is that such a bad thing?

* “My broker should have known it was a dog, and he should have told me,” Bill probably said as he decided it was time to change brokers.

There are a thousand excuses for why you didn’t sell when you should have. There are more excuses for not fixing the problem now. And there are even more people who would be happy to console you and coddle you and tell you what you want to hear: that it’s not your fault. Unfortunately, quite often those people have something to gain by doing this … like wanting you to transfer your brokerage account to their firm.

Well, today is Tough Love Day. I’m probably not going to tell you what you want to hear. You see, I’d like to take a seldom-used approach here to getting back what you’ve lost in the markets. It’s an approach that you rarely hear from brokers, mutual fund companies, or the financial press. I’m going to tell you THE TRUTH.

The truth is: the Nasdaq has fallen from over 5,000 down to 1,300. That means if you had $500,000+ in those stocks, it’s now worth $130,000. The most brutal and most honest truth is: This is where you are now.

You are not at $500,000. You are at $130,000. And chances are (for most people, at least) you won’t be back to $500,000 for many years. I mean this. It will take you over a decade to get back to $500,000 — even if you’re a very successful investor and earn 12% a year. If you earn what Warren Buffett expects investors to earn in the coming decade — around 6% — it will take you over 23 years to get back to that $500,000.

That, my friend, is the truth. I know, the truth hurts … and this truth is devastatingly painful. That’s why nobody else is telling it to you. But you’ve got to understand that where you are today is where you are. Where you were is gone. You can’t dream about what you had. You can only make the smartest decisions with what you have to get back on the path to wealth.

Now, I realize this sounds like exactly what people “should” do. But I’m certain that most investors, instead of being smart, are scrambling to try to get back to where they were by taking big risks. But this is extremely dangerous. This is exactly the opposite of how to make money. These people know this … yet they’re still doing it.

I know a couple that retired two years ago with a net worth of probably $2 million. Their plan was to take out $100,000 a year (5%) as income to live on — and they figured they’d live like kings. They bought a big RV and headed out on the road to see the country. A fairy-tale retirement …

But they made one big mistake. They invested their entire nest egg in risky investments. I saw them a year ago, and their nest egg had quickly dwindled to a million. Today, I’d bet it’s significantly less than that. Now, what can you earn at the bank these days in interest? Two percent? So, giving them the benefit of the doubt, let’s say they’ve got a million dollars that can spin off $20,000 in income a year …

$20,000 a year — down from $100,000 a year?


So much for the fairy tale. That’s reality. That’s where they are. So, what the heck should they do? Believe it or not, instead of getting out of their risky investments, they’re sticking with them. Instead of getting out while they (barely) can, they’re rolling the dice all the way. It’s amazing. The punishment for failure in this case is literally complete poverty. Fortunately, their kids are successful and conservative. I hope the kids also have a nice guest room, because it’s about to get used.

It amazes me that people can work their entire lives to build up a wonderful nest egg for retirement and then squander it out of pride and greed.

It doesn’t have to happen. But for most people, that’s the way it will be. You know how, when it comes to dieting, even though you know what’s right, you still don’t change your eating habits? Well, when it comes to investing, it seems that many people — even when they know what’s right — still can’t change their bad habits.

They can’t sell their losers to cut their losses short and minimize the impact of their bad decisions.

They can’t let their winners ride and maximize the benefit of the few right moves they’ve made.

They can’t keep all positions to a minimum size (say, 5% of their portfolio) to prevent a catastrophic loss.

They can’t look only for “low-risk” opportunities.

That’s what the “Stock Market Wizards” do — the guys who regularly earn triple-digit returns. They don’t take big risks. They keep their position sizes small. And they cut their losses. (“Stock Market Wizards” is a book of interviews with top traders that was written by Jack Schwager.)

You can get back what you’ve lost. But the way most investors are going about it is all wrong. If you’re risking enough to get it all back in one shot, you’re also risking enough to lose it all. You can’t do it that way. You’ve got to change your thinking. Here’s how:


1. Get out of risky investments that you don’t understand — right now.


JDS Uniphase has fallen from near $150 to $3. Now, it may someday go back to $150. And if you understand why the shares should rise 30-fold, great. But me? I don’t invest in things I can’t understand. And I personally don’t even know what JDS Uniphase’s two business units do. (They are (1) Wavelength Division Multiplexing and (2) Optical Amplification and Transmission.) So I’m not buying.


Warren Buffet didn’t become rich overnight, and he didn’t do it by taking big risks. He consistently makes what he sees as low-risk bets, and he does so only in businesses he can understand (like razors and soda — Gillette and Coke). It works for him, and it will work for you too.


Don’t buy more. Don’t buy on the way down. Just get out of your risky investments. Trust me, you will feel a lot better once they’re gone.


2. Commit to never having a catastrophic loss again.


The way successful investors make money is not by rolling the dice and hoping. Successful investors buy the same stocks you do, but they do so with a game plan. That plan is simple. They know they’ll have winners and losers. But as long as the winners are bigger than the losers, they’ll always make money. So that’s what they set out to do.


It’s time for you to start investing with the same plan that successful investors use: Cut your losses early and let your winners ride. The easiest way to do that is to use a 25% trailing stop (a strategy I explained in Message #573). Once a stock has fallen 25% from its high since you owned it, you’re out. That’s it! And, presto … you’ll never have another catastrophic loss again.


3. Demand to get paid.


When we invest in something, we are expecting a return on our money. Up until a few years ago, investors used to demand it in the form of dividends. Now, as a Microsoft shareholder, for example, you are entitled to absolutely nothing — because Microsoft doesn’t pay a dividend.


It’s time to demand to get paid again. You get paid in real estate. (Net rents, after expenses, are still around 8%.) And you get paid extremely well (15%-20%) in stocks like Annaly (NLY) and Anworth (ANH), which shouldn’t have a problem maintaining those dividends for the next 12 months or so. (At that rate, you’d have your entire initial investment out in 5+ years — and the rest would be gravy.)


You deserve to be compensated for investing. While a great story is nice, a fat income payment is nicer. Demand it. Review all your current investments right now and see if you’re being compensated for the risk you’re taking. If you’re not, get out.