In late 2012, I bought shares of regional phone company OTT for $14,142. One year later, I sold those shares for $1667 after the company declared bankruptcy. That was an 88% drop in the stock's value. I lost $12,475. Or so it seemed at first glance. A catastrophic stock loss like this seemed to prove the folly of my high-yield high-risk investment strategy*. Or so it seemed at first glance. But when I analyzed the numbers carefully, I found that my real loss was significantly lower and that my investment strategy is proving successful. Here is how that can be in spite of that huge stock loss.
As part of my stock investing process*, I run a screen for high dividend companies once a week. OTT first came up on that screen in August of 2010; it passed my financial criteria tests, and I bought shares. A few weeks later, OTT hit my sell-at-a-profit trigger** so I sold my initial position at a gain. But then OTT came up again on my high-dividend screen as its price dipped from its previous spike and I bought it again. The thing is that over the following 2 years this process repeated itself a total of thirteen times. That means that I bought and sold that original block of OTT stock 13 times. And made a total realized profit of $6483 doing so. In retrospect, that takes my final loss on my OTT investment down to $5992. But there is more.
I only invest in dividend-paying stocks.*** So during the 3 years or so that I held OTT stock in my portfolio, I collected $1101 in dividends. (It would have been more had I not been flipping the stock so often.) Those collected dividends take down my final loss on my OTT investment down to $$4891. And that is a 35% loss on my last OTT stock purchase -- which is a whole lot better than the 88% loss it first looked like. But there is still more.
Following my portfolio diversification strategy,**** I never put more than 5% of my portfolio's book value in OTT stock. That final OTT stock purchase in late 2012 represented 3.8% of my portfolio book value at the time. So the net loss to my overall portfolio from OTT's bankruptcy and subsequent stock sale was severely limited -- to a paltry 1.3% of my portfolio book value. But there is still more.
All of my portfolio's holdings are selected based on the same investment strategy that led me to buying OTT stock. Looking only at my OTT experience, my investment strategy would seem to be a losing one. But not so when I look at my entire portfolio experience. Because, between the time I made that final OTT stock purchase and the time I sold it at a big loss, my portfolio book value had GROWN by 14.5% -- even factoring in the loss on OTT. Even more persuasive, between the time of my first OTT stock purchase and my last OTT stock sale, my portfolio's book value (as well as its dividend payout) had risen a satisfying 40%. So I am way, way ahead. And, yes, I am staying the course with my high yield, high risk dividend investment strategy*.
* My High Yield, High Risk Investing:
** What Makes Me Sell a Stock?:
*** Why I Only Buy Dividend Stocks:
**** Stock Diversification My Way:
April 23rd, 2014 at 04:24 pm 1398270272
April 24th, 2014 at 08:21 pm 1398370912
"What did you pay in taxes for the realized gains over time? How did you deduct the losses on your taxes, over time or all in one year?"
This all happened in an IRA account, so taxes do not apply... for now. Loss reporting does not apply at all, fyi.