It happens to the best of us. One of your investments has gone south and now is actively working to tank all the hard work you put into your portfolio. Don’t worry, I am here to show you the 3 steps on how to recover from a bad stock investment and turn your portfolio around.
In order to recover from a bad stock investment you must do three simple steps. First, you need to assess your investment and why it failed. Second, figure out if you can profit from the bad stock investment. Third, you need to begin to average either down or out of your stock investment.
The worst thing you can do is just sell your investment and lock in your downside. By following these 3 steps you will be able to salvage a majority of an investment or even turn it around to start becoming profitable again.
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Without wasting any time, let’s jump into the 3 steps on how to recover from a bad stock investment.
How to Tell if Your Investment is Bad
The first step to recover from a bad investment is to figure out if an investment is actually a bad one. Far too often I talk with investors who think they have a failed investment when actually they just need to wait.
This is because even if a stock declines in price, that does not mean it’s a bad investment. Some companies just have a cycle in the market and downtrend in the summer and spring while exploding in winter.
Example of a Good Downtrading Stock Investment
A good example that exhibits this cyclical boom in winter and bust in summer and spring is Nextera Energy, an energy company. During the winter $NEE sells more energy for heating homes and in the summer gets less revenue. As a result of this their stock goes up and down in a cycle.
As we can see an investment in Nextera Energy is a good investment even if it starts to go against you because of the summer to winter cycle present in energy companies. This means that even if $NEE goes down, it’s still a good investment.
I wrote an entire research article on $NEE. If you’re interested in $NEE as a possible investment check out the article below.
Example of a Bad Downtrading Stock Investment
So how do you tell if your investment is bad? Well if the underlying revenue for the company starts falling outside of market predictions then you have a failing investment.
A good example of this is the company First Majestic Silver Corp, a silver mining company. ($AG)
As we can see from the above image $AG has been in a downtrend for the entire year. This is because in May and August of 2021 they missed their earnings prediction by about half.
That’s two quarters where $AG returned less money then what analysts and investors were expecting. It does not matter why, all that matters is that for investors this is currently a failing investment.
It’s important to understand if an investment is actually a bad investment or if you just need to be patient. Chances are that if a company is seeing increasing revenue then it is still a good investment.
Step 1: Assess Your Investment and Why it Failed.
Ok, once we have identified that our investment is indeed a failed investment we need to figure out why it failed. It is important to remain unbiased during this step as we need to figure out exactly why the investment went against us.
A good example of a failed investment is the previously mentioned $AG stock.
In this scenario, let’s say that you invested in First Majestic Silver Corporation ($AG) in January of 2021 when $AG was worth $18 a share.
You decided to invest in $AG because you thought that the price of Silver would skyrocket with rising inflation rates present in the U.S. Your goal with this investment was to hold $AG for half a year and sell into the range of $30-$40.
Unfortunately, $AG did the opposite and missed earnings in May of 2021. At this point the price of a share on $AG was $16 and you want out. Your investment in total lost 12% over 5 months.
Before you sell, you need to critically evaluate why your investment failed. This is the most important step.
Back to the example. If you critically evaluated why $AG failed you would have found out that the silver market decreased and was expected to continue to decrease over 2021 and into 2022.
As such, it’s a good idea if you sell your investment since the overall market for your company is expected to decline. Further, since you know why your stock declined we can now position you to make more money with this knowledge in the next step.
Step 2: Figure Out if You Can Profit From the Bad Investment
Where one door closes another opens. Knowing that your investment has failed you should give you the knowledge to know how the stock is going to perform in the near term.
If for example your investment in $AG failed, and you figured out it’s because the silver market crashed, then you can position an investment to profit from this knowledge.
The best way to do this is either by shorting the stock over the period of 2 weeks or by strategically selling an option. My favorite is to strategically sell a covered option so that you make money from theta decay as well as the downwards movement in the stock.
The above image is of the options chain on $AG, the failed silver stock we are examining. Opened up I have the option chain on the 21st of October, 2021.
Since we found out, through the failed investment, that the market for silver is not expected to return until mid 2022 then we can look into profiting from this knowledge.
From selling 10 vertical calls at the 14.5/15 strike price we can make around $1.1 a day over the next 40 days. With a capital allocation of $10,000 you can make around $22 a day from theta decay on the contracts if silver stays at its current price. (The current percent chance of these contracts losing you money is 16%)
However, If $AG continues to downtrend then this trade will become even more profitable. This is because the chances of these contracts becoming profitable and ITM become slimmer as $AG downtrends.
Imagine if you had done this every month you had held these shares. You would have easily ended up making money on your investment over the long term.
The other step you can perform if you think the stock is going to continue to downtrend is to simply short the stock. This is a common strategy and could easily net you a decent profit.
Step 3: Averaging Either Down or Out of Your Bad Stock Investment
Once you have identified that your investment is a failed investment and have figured out how to profit from the knowledge, the next step is to start to average either down or out of your bad stock investment.
If you own 100 shares of a company at an average share price of $100 and the stock starts to downtrend but is still a good investment, then it might be a good idea to buy some more shares at a lower price to lower your total average cost per share.
What will happen is that as your good investment returns to its normal price you will make money. This is because your total cost per share is now lower. Instead of your average share price being $100 now instead it is $70 or 80. Once the stock returns to $100 you will have made $20-$30 per share!
This however should only be done on good investments that have demonstrated an increasing revenue growth. The underlying thesis is that your investment is not bad, just that it is in a bad spot currently.
If it’s a bad investment then you should think about selling your shares at the first available opportunity.
If your bad stock investment starts demonstrating that it cant generate revenue then you should start to get out. Once you have lowered your total position then you can start to employ the steps discussed in step 2 to start to make that money back.
If done properly you can even turn a bad investment into a good one.
Learning the 3 steps on how to recover from a bad stock investment is vital to becoming successful in the markets. The trick is to find out if your stock is a bad stock investment and then learn how to make money off that new knowledge.
The best way to regain your lost investment is to either engage in strategic option contracts or inverse your initial position.
As always if you like content like this then feel free to subscribe to the free newsletter on the top right of this page. It will help you remain up to date on all things stocks.
Further, you can check out some of the other articles below.
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Until we meet again, I wish you the best of luck in your investment journey.