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Balancing Fear and Greed

Don't Be Scared

Friday, June 1st, 2012

Like many other investors, I've lost money over the last month.

I'm doing decent for the year, and so are the readers who follow my advice in Early Advantage. That portfolio is up 17% for the year so far.

The Dow turned negative for the year yesterday.

And even though I consistently beat the market, I'm not immune to losing positions...

No one is.

Biggest Loser

The biggest loser I currently own is one I gladly didn't recommend to my readers.

It's a maker of ultracapacitors and electric components called Maxwell Technologies (NASDAQ: MXWL).

I've been watching it for some time. It was a $21 stock as recently as February.

The company released its first quarter earnings on April 26. Results were in line with most estimates, with earnings at $0.02 per share versus a penny loss the same quarter a year ago. Revenue was up 11% to $35.3 million but trailed estimates, which were around $40 million.

The earnings report was decent — not great — but certainly not bad...

The stock even finished up that day, opening at $15.56 and closing at $15.80.

Then, seemingly for no reason, the stock cratered.

It opened at $11.68 the next day and went as low as $8.81. A 44% loss. Overnight.

I buy what I think is undervalued. So I bought 1,000 shares at $9.88 apiece. And I wasn't alone...

Insiders started buying, too. CEO and President David Schramm bought 5,000 shares at $10.04 — the first time he bought shares in more than a year.

The stock is below $7.00 as I write this.


Would you have bought that stock?

Would you have sold it for a loss already?

Questions like these are what distinguish average investors from good or great ones. And there's a lot of emotion and philosophy at play in their answers.

There was a time when I'd never place a $10,000 bet on an ultracapacitor stock that just reported shaky earnings.

At that time, the money would've gone to rent or a car payment or student loans.

I couldn't fathom “risking” so much. I was scared to lose it all.

But do you know what happens if you're always too scared to invest?

You never profit. And then you get stuck in a vicious cycle of self-consuming fear, regret, and disappointment over missed opportunity.

I know — I've been there. And I see other people in the same pattern all the time.

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The word 'greed' has attracted a negative connotation.

But it really is synonymous with the American Dream.

Are poor, inner city kids who dream of being astronauts greedy? Of course not. And neither is anyone else who's seeking a better life.

As with everything, greed has to be tempered.

The key is striking a balance.

In my case, I used greed to overcome my fear.

I concluded that my desire to circumvent the rat race, be financially secure, and pursue whims was greater than my fear of loss.

What's more, most of our fear of loss is overinflated...

When I made my decision, I was making less than $30k a year, renting a small apartment, and driving a car I got from my parents. In other words, for all my fear, I really didn't have much to lose.

But it's hard to see that when you're in the moment.

And I have to tell you, trading in a little fear for a little greed was one of the best things I ever did.

It's helped me learn to easily separate good opportunities from bad and, more importantly, to act on them.

You can't control what the market will bring, but you can control how you respond to it.

Staying In

My 10,000 shares of Maxwell (NASDAQ: MXWL) are now worth almost $3,000 less than I paid for them.

It stings, of course. Declining balances always do.

But I'm not selling.

I've done the research and concluded the stock is still a bargain.

I can't control the broader economy. I can't end the European woes that continue to drag down the entire market. But that doesn't mean I have to sit on the sidelines.

It doesn't mean I have to lock in losses on currently down positions.

If you're full of fear, you're not playing to win. You're playing not to lose.

Or worse, you're not playing at all.

Call it like you see it,

Nick Hodge Signature

Nick Hodge

follow basic@nickchodge on Twitter

Nick is the Founder and President of the Outsider Club, and the Investment Director of the thousands-strong stock advisory, Early Advantage. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.

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