A Tale of Investing Mistakes

By: Richard A. Anderson

General Electric has long been one of the most prestigious companies in the United States. In fact, General Electric is the only one of the original twelve members of the Dow Jones Industrial Average created in 1896 by Charles Dow still around today. This speaks to the company’s ability to innovate and adapt.

However, General Electric has had a tough past 18 months or so. The company has faced a number of headwinds such as the SEC investigating its accounting practices, the U.S. Justice Department investigating its connection with subprime mortgages, declining earnings, and a collection of acquired companies that haven’t panned out.

All of this had led to General Electric’s price dropping by nearly 60% from its high in December 2016 through Friday’s market close. The company cut its dividend from 24 cents to 12 cents per share in December 2017, which marked only the second dividend cut since the Great Depression. After more than 100 years as a component of the Dow Jones Industrial Average, General Electric was removed from the index on June 26, 2018 and replaced by Walgreens. In addition, the company is further considering cutting its dividend and selling off its transportation and light bulb businesses in order to free up cash flow for general business operations.

Normally, I wouldn’t go into great detail about the perils of a once blue-chip stock other than to say this is why we preach diversification. Yet, the narrative of General Electric’s struggles took a different turn when a Reddit discussion on the topic was brought to my attention. Reddit is a social news aggregation, web content rating, and discussion website that allows users to post questions and receive answers from other users.

Back in September 2017, one user requested advice with the following post:

“My dad has $1.8 million dollars worth of GE. What should he do?

This is roughly 90% of his stock portfolio. I warned him to diversify a few years back, but he’s held the stock for years and is quite stubborn :). He is 67 years old and is retiring from GE within the next year or so.

He will then receive pension.”

Many of the responses from the internet community echoed the same sentiment: General Electric is a blue-chip company with over 100 years of existence. The company has a strong dividend and is not going out of business. The stock is already near all-time lows, so hold on to the stock and continue to collect the dividend while the price recovers.

As a follow up to the original post, the advice seeker returned to Reddit to share that his dad sold all of his shares of General Electric when the stock was trading at $18. This means that holding the position from the time of his original post to his updated post cost about $600,000.

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Had the advice seeker not sold his shares and followed the advice of the internet community, the $1.8 million position in September 2017 would now be worth only about $1 million. Adding insult to injury, the dividend income would have been reduced from $72,000 to less than $35,000.

There are four lessons we can all learn from the investing mistakes here.

1. Stocks are not bonds. Unlike bonds, in which the bond issuer is contractually obligated to make coupon payments, dividends are not guaranteed. A company can cut or eliminate its dividend at any time without shareholder approval.

2. Diversification is critical. Having 90% of your net worth tied up in one single stock is dangerous. When you are nearing retirement age and are an employee of that company, the danger is compounded. It means your current wealth is unnecessarily tied to the performance of one company. If that company falters or goes bankrupt, it would not only affect your stock positions but could jeopardize future pension and retirement benefits.

3. Don’t go to the internet for financial advice. In a world where we have more information at our finger tips thanks to the internet, it can be tempting to seek out financial advice on message boards and websites. But, as illustrated in this example, this “free” advice can come at a hefty price. When it comes to financial advice, it is best to seek professional guidance.

4. Have a plan of action. Most financial decisions are based on the emotions of fear and greed. By having a plan, you take the emotion out of it. If you do find yourself with a concentrated position in one stock, it can be intimidating to sell all of that position at one time. There is always the fear that you sell and the stock sky rockets, leaving you with regret. The opposite is also true; you hold onto the position and the price drops. Therefore, it’s important to develop a plan for reducing concentration risk. This could be as simple as selling a quarter of the shares on the first business day of the next four calendar quarters. It’s doubly important to then stick with the plan.