The Initial Public Offering (IPO) of Snap, Inc. (SNAP), the parent company of the Snapchat app, has been a disaster. Here is its chart, as I write this:
All of those red candles are not good news. In the parlance of our current President, this IPO was a Bad Deal. The stock that was offered in the IPO had no voting rights. The founding owners retained all voting rights. What good is that? Now that users are finding more and more alternatives to Snapchat, together with the no voting rights issue, SNAP has some major fundamental issues to overcome. Its long term prospects do not look good.
It is too bad because, at the time of the IPO, it was stated that a lot of Snapchat users, who were mostly young people, made SNAP their first investment in the stock market. This experience will leave a bad taste in their mouths for future stock investing. One can question their wisdom, but such was the story. Those investors probably did not consult professionals prior to their purchase.
What To Do?
When one buys a stock that subsequently goes down, one’s impulse often is to hold tight and not sell. This impulse reflects optimism in the future of this company and this investment – it’s a good thing to be optimistic. It also reflects a sense that, if one sells something that has gone down, one is either not admitting one’s own mistakes, or not willing to recognize a loss, or both. Even worse, one may be tempted to double down and buy more – If you liked SNAP at $22, you will love it at $14! It is on sale!
Sell Your Losers
My rule is to sell positions that don’t work out. If a position goes down 7% or more from the price you bought it at, sell it. That’s a fast rule for me. You don’t have to put in a Stop-Loss order, but you need to monitor your positions to make sure you don’t violate this rule. By selling your losers, you are not admitting defeat. Get over it! Instead, you are living to fight another day. The top movie currently playing is “Dunkirk”. The evacuation of the Allied troops at Dunkirk was a major victory because it allowed the Allies to live to fight another day. An evacuation as a victory? Sounds like an oxymoron, but in the case of WW II, the Dunkirk evacuation was a victory. Likewise, by selling your positions that are down 7% or more from your purchase price, you are living to invest another day. All it means is that you bought the stock originally at the wrong price, and now is not the time to be owning it. A precipitous decline may portend bigger problems in the company. Losing 7% of your investment is painful but losing 100% is worse.
Long Road Back
The math is against you, as well. If a stock goes down by 50% from your purchase price, how much does it thereafter have to appreciate before you get your money back, which is before any profit? 100%! It has to double in price! That’s a tough road to travel. Losing stocks can decimate your portfolio returns. It can be tough for one’s ego, but it is best to sell.
I am advocating anyone out there who has a position in SNAP that has declined 7% from their purchase price to sell it. Anyone who has just bought in at the current lows: Good luck to you! Anyone for whom SNAP was their first stock investment: I am sorry for your situation, but SNAP was a bad deal, and you can learn how to be a good investor by learning from this situation and selling your SNAP.