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Summary Twitter is a great example of emotional investing. How long can one hope for a turnaround? Twitter is also an example of how emotional investing can lead to big time losses. I have a difficult time understanding why many people want to hold onto Twitter (NYSE: TWTR ) and speak of its potential. The analyst community, who are supposed to be an unbiased group, does not want to openly admit that they were wrong about the stock. According to Investopedia the hold rating from the ownership perspective means that if you own the stock do not sell it. Therein lies the problem. It appears to me that analysts themselves have not invested their own money. If they did, they would not tell investors to hold onto a stock that has lost over 50% of its value. I do not mean to sound harsh, but cutting your losses is one of the first fundamental investment principles taught. You can always go back in if the stock starts performing again. If not, take your capital and move on to another security. (click to enlarge) Source: Yahoo Finance Dollar-Loss Averaging Dollar-cost averaging plays on the psychological aspect of human emotions as well. It adds to our nature of wanting to be right all of the time. We can interpret our deceptive actions as having a positive effect on our position. (I like to think of the concept as dollar-loss averaging.) Unfortunately, it is one of the worst concepts mainstream finance preaches. Basically if you buy Twitter at $60 and it goes down to $50 and $40 and so on you buy more because instead of paying $60 per share you effectively paid $50 per share assuming equal purchase amounts. However, this is very deceiving. Initially you paid $60 total, but now you paid $150 total. You have allocated more capital to a bad investment. Overhead Supply There is also another concept called overhead supply. According to Investor’s Business Daily , “Overhead supply represents price levels at which a stock’s recovery is impeded as it tries to rally back from a steep decline.” It is due to investors who got into a specific stock earlier and are waiting to get out at breakeven. Once the price hits specified levels a wave of selling hits the stock making it difficult to climb. This is exactly what is happening with Twitter. So many people want to get out of this stock that it is having a difficult time climbing higher. IBD also pointed out that this specific behavior is due to the loss avoiding nature humans have. Is Hanging On Worthwhile? Assume for a minute, Twitter stays in this $20-to-$30 range for the next 10-to-20 years or never recovers. Don’t think it’s possible? Take a look at the chart of General Electric (NYSE: GE ) below. You were much better off investing in the SPY (NYSEARCA: SPY ) or some other broad market fund. (click to enlarge) Source: Yahoo Finance Is Getting to Breakeven With Twitter Worthwhile? Additionally, I am assuming those in Twitter are hoping for a breakeven investment. For that, I have two scenarios to consider. Let’s say in a simple scenario you bought Twitter at its peak and it does recover in 10 years. Let’s also say you purchased the SPY ETF for the same monetary value. What have you gained? Getting back to breakeven after 10 years is no accomplishment for your Twitter holding. With the SPY, assuming its 10% annual return continues to hold, you more than doubled your money. You made approximately 159% of your initial capital. [(1.1^10)-1]/[1] Now let’s take this one step further with a much more concrete example. Assume you invest $10,000 in Twitter. Let’s say you were so emotional about the investment even though it was slowly declining. It finally got to the point where you could not take more pain and took a 50% loss. After taking a few hours to recollect yourself, you decide to invest the $5,000 you have left from Twitter into the SPY ETF. After 10 years, your account is $12,968.71. [(5000*(1.1^10)] Both are much better alternatives than hoping for a breakeven trade. Conclusion For those in Twitter, if you manage to make money, that is great. I am happy for you, but do not try to bank on luck. I think it is best to take the pain if you are in the stock. Scalper1 News
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