Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19
Boris Johnson's "Do or Die, Dead in a Ditch" Brexit Strategy - 11th Sep 19
Precious Metals, US Dollar: How It All Relates – Part I - 11th Sep 19
Bank of England’s Carney Delivers Dollar Shocker at Jackson Hole meeting - 11th Sep 19
Gold and Silver Wounded Animals, Indeed - 11th Sep 19
Boris Johnson a Crippled Prime Minister - 11th Sep 19
Gold Significant Correction Has Started - 11th Sep 19
Reasons To Follow Experienced Traders In Automated Trading - 11th Sep 19
Silver's Sharp Reaction Back - 11th Sep 19
2020 Will Be the Most Volatile Market Year in History - 11th Sep 19
Westminister BrExit Extreme Chaos Puts Britain into a Pre-Civil War State - 10th Sep 19
Gold to Correct as Stocks Rally - 10th Sep 19
Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - 10th Sep 19
Stock Market Sector Rotation Giving Mixed Signals About The Future - 10th Sep 19
The Online Gaming Industry is Going Up - 10th Sep 19
The Unknown Tech Stock Transforming The Internet - 10th Sep 19
More Wall Street Propaganda - 10th Sep 19
Stock Market Price Structure Still Suggests We Are Within Volatile Rotation - 9th Sep 19
Stock Market Still Treading Water - 9th Sep 19
Buying Pullbacks in Silver & Gold - 9th Sep 19
Government Spending - The High Price of a "Free Lunch" - 9th Sep 19
Don't Worry About a Recession - 9th Sep 19
Large Drop in Stocks, Big Rally in Gold and Silver - 9th Sep 19
US Stock Market Hasn’t Cleared The Storm Yet - 8th Sep 19
Precious Metals Were Ripe for a Pullback - 8th Sep 19
Market Chart Patterns to Spot High-Confidence Trading Opportunities in a "Pinch"! - 8th Sep 19
Five Feet High And Rising - Stock Market Bulls False Sense of Security - 8th Sep 19

Market Oracle FREE Newsletter

The No1 Tech Stock for 2019

GE’s Stock Price Crash Holds an Important Lesson About Investing

Companies / US Auto's Nov 28, 2018 - 03:56 PM GMT

By: Jared_Dillian

Companies The main problem with most investors is that they have a very small imagination.

GE is a single-digit midget. Who could have predicted that?

I have been speculating about the probability that GE could go bankrupt.

Bankrupt? A stock that was in the Dow for 100 years?


Yes, bankrupt. Option prices suggest a probability of about 2–3% that GE will go down for the dirtnap.

In finance, good things tend to get better, and bad things tend to get worse. Turnarounds are exceedingly rare. And trend followers know this.

Everyone loves an underdog, but it is a terrible investment strategy.

Sell Before It Goes to Zero

Some of you are probably holding onto GE. You think it is temporarily mispriced and will soon shoot up.

Very unlikely.

GE has a lot of debt, and is furiously trying to sell assets. But it may not be able to move quickly enough.

A few weeks ago, I talked about portfolios and rebalancing. I talked about people whose portfolios were dominated by one stock that had grown to the sky.

Well, the opposite can happen, too.

One of your stocks can go to zero. If you have a portfolio of 10 stocks, each at a 10% weight, and one of them goes to zero, it will be hard to have a good year.

So the idea is to sell before it gets to zero. But in reality, it is not so easy to sell a stock like GE at $8.

It is even harder to sell it at $2. But selling at $2 is way better than watching it go to zero.

I’m not sure if there is a name for this phenomenon, where it gets harder to sell something on the way down.

Endowment effect, maybe, but maybe not. Either way, we don’t need a name for it.

Don’t fall into this trap.

AT&T Could Be Next

Speaking of stocks that are in trouble, some people started pointing fingers at AT&T.

(Full disclosure: I own a small amount of AT&T. I have held it in a UGMA account since I was literally eight years old. A widow-and-orphan stock, and I was an orphan. It’s not much. Now I am thinking of launching it.)

Anyway, AT&T has $181 billion in debt. It’s easily the most indebted company in the US (and possibly the world), adding lots of it with its recent misadventures into media and entertainment.

The stock yields 6.5%. And I’m sure some people think that’s a great dividend yield.

Actually, that is not a great dividend yield. Usually when a stock yields over 6% (unless it is a REIT or a tobacco stock), it means trouble.

So this is how the story goes.

There is a lot of corporate debt out there. And if the credit markets get funky, people will go after AT&T first.

I assure you that will happen.

My prediction is that AT&T will one day be in the same predicament as GE. That dividend yield is not so safe—they will have to cut it to make interest payments on the bonds.

But that will not be enough, and asset sales are next. Hard to pay back $181 billion in debt.

Heaven forbid AT&T ever gets cut to junk. That will be a day to remember in bond market history.

Use your freaking imagination. If I told you even a year ago that GE and AT&T could cease to exist, you would have said no waaaaaay. Way. Throw in Sears and some other old-line retailers, too.

It is an achievement for a company to last 100 years. It is hard to last much longer than that.

Here’s the Lesson

The lesson here isn’t to dive into your brokerage account and sell your own stocks. The lesson here is that you should exercise a little brainpower and long-term thinking.

I spend a lot of time telling people not to fool around with dumb stuff like Bitcoin and pot. It’s also worth telling people not to screw around with stocks that are like an anvil on a glide path.

People don’t sell these stocks because they are afraid that they’ll sell the low and the stocks will pop back up. They are trying to minimize regret. It’s probably not the low.

If we have a bear market and a recession, there will be more stories like this.

Actually, the worst part about owning a stock that goes to zero is that it then goes to the Pink Sheets. At that point you won’t be able to trade it. It just sits in your brokerage account and mocks you when you pull up the screen.

Then it really will be pointless to sell it, because you’ll get something like a dollar.

I like to make fun of trend followers, because they say things like, “I buy the stocks that go up, and sell the stocks that go down.”

Trend followers are simpletons. But there is a weird sort of wisdom in a statement like that. You really should sell the stocks that go down.

I’m a proponent of not staring at your portfolio on a daily basis, but I recommend checking in fairly regularly to make sure everything is okay.

Grab Jared Dillian’s Exclusive Special Report, Investing in the Age of the Everything Bubble

As a Wall Street veteran and former Lehman Brothers head of ETF trading, Jared Dillian has traded through two bear markets.

Now, he’s staking his reputation on a call that a downturn is coming. And soon.

In this special report, you will learn how to properly position your portfolio for the coming bloodbath. Claim your FREE copy now.

By Jared Dillian

© 2018 Copyright Jared Dillian - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules