Robinhood: A terrible company reports terrible earnings; The Berkshire Hathaway annual meeting will be in person in Omaha; What to do when you've lost a lot of money on a stock
1) Following up on yesterday's e-mail, in which I lamented how many naïve retail investors were incinerated in the meme stock bubble, the single company most responsible for this sad destruction of many average folks' lifetime savings was brokerage Robinhood Markets (HOOD).
Investing legend Charlie Munger correctly labeled this company a "gambling parlor" that it is "beneath contempt," because its business model is focused on encouraging its users to speculate madly by day-trading options, absurdly overvalued meme stocks like GameStink (GME) and AMC Entertainment (AMC), and worthless garbage like Doggycoin (DOGE).
Given how many Robinhood customers are licking their wounds after suffering grievous losses, it's hardly surprising that the company reported fourth-quarter earnings yesterday that badly missed estimates, with a net loss of $423 million that was nearly double what analysts expected. The stock tumbled 5% this morning and has now collapsed nearly 80% from its post-IPO high last August.
Well deserved!
Earlier this week, my colleagues and I shared a few of our boldest predictions along with a few stock recommendations during our Predictions Summit 2022. Naturally, I couldn't help but name a couple of stocks to avoid completely right now, too... as well as point out some of the bargains we're seeing...
I also revealed how you can get six free months of elite market research. Click here to learn more.
2) At the exact opposite end of the spectrum when it comes to company integrity is Berkshire Hathaway (BRK-B), which just announced that after two years of virtual meetings due to the pandemic, it would be holding its annual meeting in person in Omaha, Nebraska, on Saturday, April 30.
I will be attending for the 24th year in a row (22nd in person) and hosting my usual cocktail party Friday night and perhaps another event as well.
Nonagenarians Warren Buffett, 91, and Charlie Munger, 98, won't be doing too many more of these special weekends, so book your flights and stay tuned for details!
3) As I've discussed in recent e-mails, beginning nearly a year ago, but especially in the past month, high-growth stocks have been absolutely massacred. Roughly half of the stocks in the tech-heavy Nasdaq Composite Index are down by 50% or more from their 52-week highs... And the Nasdaq is off to the worst start to a year in its history – and that includes the dot-com bust and the Great Recession of 2008-2009.
In light of this, I wanted to share an excerpt from my forthcoming book, The Rise and Fall of Kase Capital, on the three-step process to follow when you've lost a lot of money on a stock.
First, assume the market is right, and you're wrong.
You must begin with this mindset because it helps overcome the natural bias we all have not to want to admit a mistake.
You must respect the market. The hard truth is that most of the time it's right... and you're wrong.
Then, you must figure out what you've missed and actively seek out disconfirming information.
Redo your work... But don't just rehash what you already did. That won't lead to any new conclusions. Instead, you must ask – and honestly and correctly answer – a series of key questions.
Have you made a research error? Are you possibly missing anything? Have you openly and carefully considered contrary arguments? Have you invented new reasons to own the stock (so-called "thesis drift")?
Many smart investors lost a lot of money owning film company Eastman Kodak's (KODK) stock in the decade before it filed for bankruptcy in January 2012. It wasn't an unreasonable investment initially... The company had one of the strongest brands in the world, it generated robust cash flows, and its stock traded at a low multiple of earnings. Sure, digital photography was a threat to Kodak's film business, but it seemed far off – and the company was making investments to compete in this space.
For most investors who lost money with Kodak, the mistake wasn't so much the initial purchase. Rather, it was the failure to recognize that the film industry was rapidly being obliterated and that Kodak was getting no traction in the digital arena... so its profits declined year after year and eventually disappeared entirely.
The key is to tune out the noise and think clearly and rationally. Focus on the fundamentals... If the company's earnings rebound, its stock will as well. And if they don't, look out below!
Lastly, to make the right decision, you must pretend like you don't already own the stock.
It's so hard to make the right decision about a stock you've lost money on. The emotions can be overwhelming!
On the one hand, you're probably telling yourself that if you liked it at the price you bought it, you should like it more now that it's cheaper. That may be true – but it could also be a value trap.
No matter what, you must resist the temptation to double down, again and again, to try to make back your losses. Remember the old saying... "You don't have to make it back the same way you lost it."
On the other hand, your emotions are likely telling you to sell, so that you don't have to suffer any more pain and never have to think about this terrible stock ever again.
There's also a powerful feeling of wanting to wait until it gets back to the price you bought it before selling.
You must resist all these feelings! Emotions are deadly when it comes to investing...
I've found that it helps to pretend like I don't own the stock. I ask myself, "If I were 100% in cash today and building a portfolio from scratch, would I own this stock? And if so, what size position would it be?"
Doing nothing may be the best option, but you also must have the courage to admit a mistake and get out – or know that you haven't made a mistake and buy more.
If a stock is running against you, follow this simple three-step process. And if you wouldn't buy the stock if you were starting a portfolio from scratch, then you should sell it immediately.
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.