Can’t Win for Losing
Today I won. I sold a stock for the same amount I originally paid for it, after having watched it lose 80% of its value. It took 4½ years, but I finally got out, and can happily proclaim that I didn’t lose a cent! What an emotional high!
The reason this is worth sharing with you is because it’s a “teaching moment”.
Virtually all smart investors would say I should have sold that stock earlier in its decline - even though it would have been at a loss - rather than hang onto it for years in hopes it would recover. And they’re absolutely right: I should have sold earlier. I was incredibly stupid, letting my vanity and loss aversion overrule my judgement, and I only escaped with my investment intact due to an unbelievable amount of good luck.
Let me walk you through the timeline of my investment, so I can explain exactly how stupid I was. Here’s the overview:
DatePriceComment 6/21/2017$18.50I bought stock in Brazilian aircraft manufacturer Embraer S.A. (ticker ERJ)12/21/2017$26.25ERJ jumps on WSJ report of an impending joint venture with Boeing (ticker BA)2/26/2018$28.55ERJ at high point, an unrealized 54% gain for me7/5/2018$26.59ERJ & BA publicly announce JV memo of understanding2/26/2019$21.38ERJ shareholders vote and ratify JV1/21/2020$18.07With investors frustrated by delays getting EU regulatory signoff, ERJ falls below my purchase price3/11/2020$11.92WHO declares Covid-19 a pandemic, the aviation industry is especially hard hit, and ERJ stock plummets4/24/2020$5.70After months of rumors and foot-dragging, Boeing publicly terminates the JV, and ERJ stock plummets again10/29/2020$3.96ERJ at low point in midst of pandemic, now an unrealized 79% loss for me, down 86% from its 2018 peak10/11/2021$18.50I sold my stock at a wash after ERJ recovers thanks to new orders, a return to profitability, and leadership in the burgeoning eVTOL market
For 2½ years, Embraer looked like a viable investment, especially with the promise of a joint venture with Boeing. But then two “black swan” events crushed the stock: the Covid-19 pandemic, and Boeing’s drawn-out decision to unilaterally back out of the JV.
But as things headed south, I always had the opportunity to sell. I might have gotten out at a loss, but I could have invested those funds in a company that was growing, rather than continuing an epic collapse. Financially, it would have made lots more sense to take a smaller loss earlier and pivot quickly. After all, the Boeing deal wasn’t ever going to magically come back. And while I didn’t think the company deserved the $3.96 share price it hit at its lowest, there was no guarantee Embraer would survive Covid-19, much less fully recover and thrive.
There’s a sneaky but immensely important bit of math at work here that every investor should remember. My investment in Embraer had lost 79% of its value. But it takes far more than a 79% gain to get back to even. A 79% gain on $3.96 would only bring the stock price up to $7. In order to get back to my $18.50 purchase price, Embraer needed to gain another 367%! There aren’t many companies that can quadruple their share price, and even fewer investors who would be willing to sit around waiting for it to happen.
So the obvious question is why I didn’t get the hell out earlier? I think there are three reasons.
First, I hadn’t put a ton of money into Embraer, and as its unrealized value got smaller and smaller, the amount of skin I had in the game became less and less significant. When you’re already lost 80% of your investment, losing the remaining 20% isn’t that scary a prospect! Mentally, I had written off my stake in Embraer and just “let it ride”.
Also I didn’t think the company was so damaged that it justified a $4 share price. It had been worth $18 prior to the Boeing JV, and I was pretty confident that it would recover some (maybe most?) of its market value… if it survived the pandemic.
Those were the things I told myself, but the biggest reason why I never sold is because I didn’t want to be a loser. Selling an investment at a loss is an admission that I was wrong - that I made a bad decision - and “loss aversion” is one of the most basic emotional errors an investor can make. It’s probably the clearest example of how one’s ego can interfere with one’s ability to make rational investing decisions. And like any gambling “ploppy”, I was 100% committed to avoiding a loss.
In this instance, it’s hard to overexaggerate just how lucky I was. ERJ had to quadruple in value, without the Boeing joint venture, just for me to soothe my ego and get out without losing money, and it had to quadruple so quickly that I wouldn’t feel guilty about the opportunity cost of not moving that money to another company that would have grown faster.
I’d like to - and should - chalk that up as a painful lesson in loss aversion. On the other hand, I still might take the wrong message from this episode. After all, like a hard-luck gambler who hits a jackpot to climb out of a losing session, it’s hard to deny the emotional high that I’m feeling from my “victory” of finally getting out of my Embraer position without realizing a loss.
But I really should know better…