Lessons from losers

FIVE STOCKS THAT CRUSHED INVESTORS, AND WHAT YOU CAN LEARN FROM THEM.

Most investors, naturally so, look for stocks that they think are going to go up. Short sellers, of course, do the opposite — they look for stocks destined to decline. However, even i nvestors who never, ever plan to short stocks can still learn important lessons from stocks or securities that have been, well, terrible. Knowing what makes a ‘ bad’ investment first can help steer you toward a ‘ good’ investment. After all, not losing money is generally the first rule of successful investment management.

With that intro, then, let’s take a look at five securities that have been truly stunningly bad investments. Of course, there are plenty of bankrupt companies and discontinued ETFs we could focus on, so instead we will restrict our l ist to fairly widely- known securities, and those that still trade a lot, continuing to cause investors to (usually) lose more money. Some of these securities would have turned millions of dollars into a dollar or two.

Since this is the exact opposite of what most investors want, gleaning some lessons from these losers might be very beneficial.

DRYSHIPS ( DRYS ON NASDAQ)

First, the stunning fact. When adjusted for share consolidations over t he years, shares of DryShips have gone from $ 1.515 million per share to $ 1.17 per share in 10 years. That is not a typo. That is a decline of 99.9999992 per cent. This year alone, the stock has declined 94.2 per cent. Of bizarre note, the company recently declared a dividend, after omitting them in 2008. The company operates dry bulk shipping carriers. In 2016, it lost $464.76 per share on $51.9 million in revenue. Market cap is $ 177 million and it still brings in buyers, with trading usually more than 30 million shares a day. Lesson to be learned: Investors can’t stand share consolidations, and losing money is not great for share prices ( split- adjusted, DRYS lost $ 10,023 per share in 2015!).

WESTPORT ( WPRT ON TSX)

I have often, and very recently, called Westport “just about the worst stock on the TSX,” in my opinion. Shares have declined from $ 80.50 per share in 2000 to $ 1.13 per share, a drop of 98.6 per cent in 17 years. The company continues to develop its natural- gas injection technology, but has never made money in at least 21 years (as far back as Bloomberg data goes).

Worse, if we add up how much money the company has raised in equity financings over the past 10 years — about $ 700 million — it dwarfs the company’s current market capitalization of $123 million.

That money has gone to fund product development and negative cash flow, but at some point, surely, investors need to see the company make money. Shares are down 24 per cent so far this year. Lesson tobe learned: Companies need to make a profit, one day. Two decades is a bit too long to wait.

VXX ( THE IPATH S& P 500 VIX SHORT TERM FUTURES ETN)

Many investors use the VXX as a security to hedge against a big market decline. There has been lots of discussion about how volatility has disappeared from the stock market. There is no better example of this than VXX, the ETN that is most widely used as a barometer for the VIX Index itself, commonly known as the “fear index.” VXX is what investors will buy if they fear an increase in volatility. But, let’s look at how that’s gone for them since the financial crisis of 2008 and 2009, when volatility went crazy. The VXX, adjusted for consolidations, was $ 30,561 in March, 2009, and is now trading at $ 16.34, a drop of 99.9994 per cent. Lesson to be learned: Portfolio insurance can be very expensive, doesn’t always help, and needs to be bought before a crisis, certainly not during or after one.

TRANSALTA ( TA ON THE TSX)

Sure, we will give Trans

Alta kudos for its recent recovery. The stock, an energy utility, has risen 26 per cent in the past year. Let’s go and look further under the hood, however. In 2008, TransAlta was a $ 37.50 stock. Today, it is $7.21. That’s a drop of 80.8 per cent. Along the way, the company has had two dividend cuts. Thus, long- term income investors, who specifically target utility companies for solid income and safety, have had neither, for a very long time. Let’s compare that to Enbridge ( ENB on the TSX). In the past 10 years, shares of ENB, an energy infrastructure utility, have gone from $ 17.20 per share to $55.05 today, a gain of 220 per cent. Along the way, Enbridge has raised its dividend 10 times. Lesson to be learned: If a stock bought for a specific reason ( here safety, income and growth) fails to deliver, t hen don’t stick around hoping for a recovery.

As we like to say, “hope is never a solid investment strategy.”

KATANGA MINING ( KAT ON THE TSX)

We often mention Katanga in our investor presentations, simply to highlight how share dilution can hurt investors. After all, the company has 1.9 billion shares outstanding.

KAT is getting a lot of notice these days, as the cobalt sector surges. It is a big producer. In fact, its stock is up 107 per cent this year already, so you may wonder why it’s on this list. But in 2007 shares of KAT, when it only had 99 million shares outstanding, were $ 21.21 each.

Today, even after doubling in 2017, they are $ 0.29. The 10- year decline: 98.63 per cent. Lesson to be learned: Watch your share count.

Most investors will own some pretty big loser securities in the course of their investment career. There is nothing like losing money to learn and remember a good i nvestment l esson. Hopefully, with some of this guidance, you may be able to make your next loss at least a little less painful.