Ornoth

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:

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…

In recent months I’ve seen at least three college graduates on my friends list type “loose” when they meant “lose”, or vice versa, and it’s just as common an occurrence for the people who write for my magazine.

I find that surprising. The two words are completely distinct: in meaning, in part of speech, and in pronunciation. It shocks me that anyone could mistake one for the other, and it usually lowers my opinion of the author’s intellect when I see it.

So in an effort to ensure that doesn’t happen to you, I’d like to provide a little review. I’ll make it as quick and painless as possible, but it may require a bit of mental effort to internalize the difference.

Here’s the lazy person’s rule: if you say it aloud and get a “Z” sound, that’s “lose”; if you get a soft “S” sound, that’s “loose”. If, as a native English speaker, you have a reliable ear, that might be all you need.

But if not, here’s the gritty that is nitty…

“Loose” is usually an adjective. It describes something not firmly attached. Your belt is loose. A knot is loose. Some *thing* is loose. But it has absolutely nothing to do with something that is (or might become) lost, and you usually can’t “loose” something¹.

“Lose” is a verb; something can’t be “lose”. It is an action: you lose something. You lose your way. You lose your keys. You might even lose weight one of these days. If you lose something, it becomes lost; you can’t find it or don’t have it anymore.

That covers 99% of all cases. Unless you’re a purist, you can commit the above to memory and never look silly again.

¹ Now, for the purists out there, “loose” can, in fact, be a verb. In rare instances, you can actually loose something. However it still has the same basic meaning: to release or unattach. You can loose a boat from a mooring. You can loose an arrow. It’s like a more complete form of “loosening”, as you’d loosen a tie. But in none of these instances does the object you loose or loosen become lost. If you lost it, then you want “lose”, never “loose”.