Rational or Emotional? You Make the Call

Today has been one of those glorious days when nothing seems to go right and looking back you learn a few things. I, like everyone else, lost a lot of money last year. After I lose money, I immediately start thinking of a way to make that money back plus some. When Time Warner first announced it was spinning off Time Warner Cable last year, I began brainstorming about when to buy, how much to buy, and what I could sell to buy. I learned that TWC was giving out a special $10.27 dividend when the split was complete. It was supposed to happen at the end of 2008 or beginning of 2009. I sold UNH and URBN right before Thanksgiving last year anticipating bad sales reports. I was right, there were bad sales reports, and these two stocks made the most sense to sell at that time. I actually sold UNH because I wasn't sure what Obama had in mind for healthcare reform, not because of Christmas sales. I immediately put that money into TWC. TWC has stayed pretty even for the last 3 months. The Wall Street Journal reported that shareholders as of March 11, 2009, at 7PM would receive the dividend from TWC on the following day. So when I got up this morning to see the open, I was really surprised and really pissed all at the same time that TWC was down $11. What was close to $20 a share was now trading at $7. It made no sense to me that 2 days before you had to be a buyer to get the special dividend, the stock would be down over 60%.

When I first saw that TWC was trading at $7, I just froze. I had no idea what was going on or why I had just lost $2,000. I then started scheming about which stock to sell to plunge right back into it to try and salvage what I could. What was originally supposed to be a trade to salvage most of UNH and URBN was now a trade to salvage TWC. I ended up selling RIMM. I really like RIMM and their products. So why sell? First, it was be easier to make up this loss than maybe MS or BAC. I wasn't in as deep here as I was in some of my other investments. Second, RIMM doesn't believe in themselves. Their predictions are always too low, they seem to be too conservative with numbers and products. If they can't believe in themselves, how can I then believe in them? That got me to thinking. Sometimes we don't believe in ourselves. If there is some goal we are trying to achieve, and we don't think we can do it, how is anyone else going to think we can do it? Third, rationality told me to do so. I needed to buy more. Why? When a company gives you free money to the tune of $10+ for every share you have, it is just plain stupid to not take advantage of. I decided I needed to double back in and halve my loss that I had taken so far. They are not canceling the dividend so why not invest more after a day like today?

When making decisions like this, you have to remember a few key things. First, does this make sense? Did buying a stock for a special dividend make sense? I think so. Second, is there a way out if the market, or I, decides to change its mind? How am I going to hedge myself against further loss? I wait until the end of the trading day on Wednesday and set a stop loss. If everyone decides to back out as soon as they get their money, I also am out along with all my money so I don't get pummeled again. Third, is my choice rational or emotional? I think what started out as emotional ended as a rational decision to lower my average cost and take advantage of free money. Who knows, that decision could earn me lots of cash money. At any rate, I learned a lot today. Although, none of it will matter if I refuse to admit this defeat or don't use this failure to ensure future success.