Before I begin I must say this is by far the most difficult yet necessary article I have written on Seeking Alpha. When I first joined this community in early February I commented on some of the advice being dispensed here regarding SUNE. I regret that I didn't take the time then to expand upon my comments in the form of a full article. Nonetheless like most things in life it is better late than never and I believe what I have to say now is still as relevant as ever.
This article is not going to discuss the details regarding SunEdison (NYSE:SUNE) or their chapter 11 filing. Instead I will be addressing SUNE investors from all walks of life who have been severely and negatively impacted by what has transpired. I will provide a step by step guide for those that have found themselves in this awful situation and simply do not know what to do, what to think or who to turn to. I have also personally had the misfortune of being in a similar position so I know all too well what many of you may be feeling.
Step 1: Admit to yourself that you have been wrong to invest in SUNE.
This is possibly the most difficult pill to swallow and I completely appreciate the fact that this is the last thing you want to hear. However it is absolutely critical that all investors are able to do this. Most of us in this community have decided to manage our own money because we have the confidence that we are capable of beating the market. Although this confidence is essential for being decisive in a fast paced and high stress environment it must also be balanced against a healthy amount of humility.
There are immediate benefits for taking this first step:
- You will immediately begin to feel a lot better about your situation. By admitting that you are just human and prone to making mistakes you will take a huge amount of pressure off your shoulders.
- You are going to be less likely to act from a position of emotional weakness and compound upon your mistakes which will only make your situation worse.
- You will be able to improve yourself as an investor which will lead to huge financial benefits in the long run.
This may sound bizarre but the most successful investors that I personally know have gone overboard on developing their humility. Every time I have the chance to talk with these individuals they have a tendency to unload their laundry list of recent investment failures on to me. Many of these individuals also have a preference for self-deprecating humor. I believe they have developed these personality traits over their long illustrious investment careers as a coping mechanism for the challenges that the market presents.
Step 2: Tell your friends, family and loved ones about what has happened and start making the necessary adjustments to your life.
Once you are able to admit to yourself your investment in SUNE was a mistake you must then inform those close to you. Again I completely appreciate how difficult this could be especially if the financial situation of your household is already difficult. However the worst thing you can do is let your financial wounds fester by refusing to be transparent to those who care about you. If you try to cover up what has happened you will simply implode.
In life many tragedies such as accidents or illnesses can suddenly befall upon us that could have been easily avoided with the benefit of hindsight. I personally believe that catastrophic investment decisions also fall into this category. Although you only made what seemed to be a few harmless clicks with your mouse the negative impact those clicks has had on your life has become enormous.
The reality is that together with your loved ones you will have to learn to make adjustments to your life in order to deal with the financial tragedy that has befallen you. You and your loved ones may have to retire later or less comfortably than you originally anticipated. You may have to take up a second job or work overtime shifts. The amount of money you have lost and your age will determine the size of the adjustments you will need to make. Whatever the necessary course of action is you need to start planning today.
Step 3: Reflect on what went wrong with SUNE and update your check list. If you don't have a checklist make one today.
A checklist of investment criteria essentially acts as a screening tool to prevent you from making investment mistakes. If you don't already have a checklist of criteria for all of your investments I suggest you create one ASAP. As you gather more experience overtime you can continuously update your checklist to reflect what you have learnt.
You can make this checklist as sophisticated or simple as you want. You could create one from scratch or you could even search around for one on the internet. Investing is not an originality contest, all you have to do is follow what works. Having said that if you do copy someone else's checklist beware that you may not fully understand the usefulness of the rules you are using. Because of this you could potentially waver in your application of them. The rules themselves may not even be appropriate.
I will give you an example one of the items on my checklist which I earned through (painful) experience. Any equity that I directly invest in has to have a net debt position that does not exceed 66% of its market capitalization regardless of its sector. My rationalization for this is the fact that the company still has the possibility of raising a third of its market capitalization in equity in order to half the level of debt if it became absolutely necessary. The last time SUNE satisfied this rule on my check list was back in June 2014. In other words according to my rules SUNE has been uninvestable since this time.
Another rule on my checklist (I earned painfully) that I suggest you consider regards averaging down. In my checklist I am only allowed to average down once. This rule gives me two benefits. Firstly I know that I am only allowed to have two shots at a stock. This makes me very conscientious about the price I am paying and it makes me plan where exactly I will consider adding to my position a second time and why. The second benefit is that I am not tempted to continue throwing good money after bad money by continuously averaging down. Combined with position sizing rules this is a very effective downside minimization strategy.
Of course you do not have to have exactly the same requirements on your checklist as I do. Do what you believe is best and make changes as you go. Your checklist is supposed to evolve as your experience in investing grows. You are never going to get it perfect the first time around.
Step 4: Apply the rules of your new check list to your holdings
Once you have finished updating your new checklist to your satisfaction you should immediately begin applying your new rules ASAP. This shouldn't be applied just to your position in SUNE but also all of your holdings. I understand there may be a reluctance to begin the process of crystallizing losses because it makes your mistakes feel more real. However you will need plenty of discipline to begin clawing back the ground you have lost and the best time to start this process is always now.
Once you have removed all positions that fail your new set of rules, never look back. Take all of these stocks off your watchlist and don't ever think about them again. It is not worth your time and life is too short to continue worrying about these stocks once you have made the decision to let them go.
Step 5: Realize that is not the end of the world and get additional help if you want it or need it.
Although you may have lost a significant portion of your net worth in SUNE you have to keep things in perspective. Things could always be a lot worse and we should always be thankful for other blessings we have in our life. If you feel too overwhelmed with managing individual investments going forward seek out the help of a professional or simply invest in a basket of ETFs. There is absolutely no shame in this. Spend the extra time you would have normally used fretting over your investments with those you care about the most.
Thank you for reading this article. I never forget that as an author here I am ultimately writing for real people that have real lives and real dreams. If at least one person found this useful then I consider the effort I have put into writing this worthwhile.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.