In complex adaptive systems like modern financial markets, a change the price of any one market has ...
Know When to Fold ’Em…
10/31/2011 1:50 pm EST
Staying with a sinking ship isn't always the right strategy, as debacles at Netflix and HP recently proved, but there are steps you can take to limit your risk and boost confidence to make a change when it comes time, writes MoneyShow.com personal finance expert Terry Savage.
Sometimes it's important to stick to your convictions, despite the emotional urge or outside pressures to change your mind. But other times, you need to be flexible enough to change your mind when presented with a new set of facts.
Never has that been more apparent than in the business headlines in recent weeks. First, the CEO of Netflix (NFLX) decided to reverse his decision to split the company into two parts, after the announcement and its pricing changes caused an uproar from shareholders and customers.
Then the new CEO of Hewlett-Packard (HPQ), Meg Whitman, decided to reverse the company's multibillion-dollar decision to dump HP's personal-computer division-a decision made under the previous CEO, but one in which she had participated as a board member.
Each of these reversals cost shareholders a huge chunk of money. HP stock is down 36% for the year, and Netflix lost 75% of its market value—not to mention 800,000 customers.
Everyone makes mistakes. But when leaders of companies—or countries—make a mistake, the costs can be catastrophic. It takes courage to admit a mistake, and reverse course. But that can be a better decision than continuing down the wrong road.
Take Bank of America (BAC), for instance. It saw an opportunity to replace lost profits from debit-card swipe fees by instituting a monthly $5 charge for using a debit card to access your own money. What a fiasco!
When I asked Warren Buffett—who recently invested $5 billion in BofA preferred stock—what he thought of the move, he lifted his glass of Coca-Cola (KO) and said: "New Coke." He was referring to the historic marketing mistake of 1985, which caused Coke to quickly bring back "Coca-Cola Classic." [The "Classic" wasn't fully removed from Coke packaging until earlier this year, ending 26 years of damage control-Editor.]
Sometimes experience is the great teacher. But it's important to learn the lesson quickly, and reverse course before too much damage is done.
Hopefully, research will prevent those mistakes. Just this week Chase said that after testing the market, it had decided against imposing a fee for debit card use. Of course, their decision was certainly impacted by the negative reaction to BofA's blunder. Sometimes it doesn't pay to be first to market!
So, what does all this mean for your own investment decisions and money-management plans?
Well, first you have the comfort of knowing you're not alone if you make a big mistake on an investment decision. And, at least, your mistake won't make headlines.
On the other hand, as embarrassing as CEO mistakes may be, they are cushioned by huge salaries and golden parachutes as they depart. Your mistakes could cost you your retirement. That's why it's so important to do your research, create a sensible plan, and diversify your investments so you don't have all your nest eggs in one basket.
The recent volatility in the stock market makes this advice all the more important. It may surprise you to learn that although the Dow Jones Industrial Average is about 750 points higher than where it started the year, it has traversed 22,350 points on a closing basis so far this year.
Adding up all those closing moves, both up and down, has resulted in tremendous anxiety—and a lot of second-guessing of investment decisions. But if you had determined an appropriate portion of your assets to invest in a diversified stock portfolio, you could have taken comfort in knowing that historically that portfolio would produce positive returns over a 20-year period.
And if another portion of your assets was in safe, but low-yielding "chicken-money" investments such as Treasury bills, CDs, or money-market funds, you would have had more comfort in sticking with your stock investments.
What happens if you make a mistake? What if you sold out on one of those fearful down days? Don't be paralyzed by fear or embarrassment. The market doesn't know your emotions-or care about your portfolio.
The market is moving on. And so should you.
Take a lesson from those CEOs who aren't afraid to recognize a mistake and reverse course to get back on track. The only thing worse than being wrong is staying wrong. And that's the Savage Truth.
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