Editor’s note: This article was first published in October 2014; the share prices, losses and positions it discusses are as of early October 2014. The Fannie Mae shareholder litigation and both companies have changed a great deal since. These are the author’s own speculative trades from October 2014, kept as a historical record. They are not investment advice.
Right now I have two dead weights in my investment portfolio, Fannie Mae and Navidea. The second one doesn’t worry me much, but Fannie Mae really is a problem at the moment. It isn’t a lot of money, since it’s a speculative investment, but it is somewhat more than I usually put into this kind of high-risk investment.
Fannie Mae (OTCBB:FNMA) is collapsing after a setback in the US Court of Federal Claims. That doesn’t mean investors will or won’t see a return in the long term. It’s just that, after this defeat, the legal battle looks far from over, and so, after gains of more than 1,000% in just one year, investors still have time to lock in big profits.
And of course there is always the possibility that it gets delisted. Probably a small one, but it’s there, and it would value the shares at zero. If that happened, big hedge funds would lose a few hundred million. Bill Ackman, for one, holds $115 million in Fannie Mae shares.
So what do we do with Fannie Mae?
I’m not going to beat myself up too much, and certainly not with hindsight. When you make a speculative trade and the stock doesn’t behave as you expected, you should cut the loss immediately. As a smart speculator, I should have cut the loss as soon as the stock dropped below $4.00, or $3.90 at most.
Of course, my initial idea was to average down if it fell, but as the drop kept going and after seeing the latest news, averaging down is clearly not an option until the stock’s volatility settles.
And after a loss of more than 60%, I’m personally not going to sell now, because it would be like picking up small change. So, in principle, this investment stays as “all or nothing”.
In other words, it’s such a huge blunder that I’m giving it only two options: 1. losing the whole investment (I hope not), or 2. leaving it for the long term and letting the markets decide.
That’s how a speculative trade becomes a long-term investment. As someone once said, “a long-term investment is a short-term investment that went wrong”.
And what about Navidea?
Navidea (NYSEMKT:NAVB) is another stock where I’m sitting on big losses, and where I have already averaged down. The difference is that I do like this pharmaceutical company and I think it will do well in the long term. Technically, it is forming a short-term floor around $1.20, so I don’t rule out averaging down again, nor do I rule out that, in a somewhat more pessimistic scenario, the stock breaks that slight support and falls to $1.00.
Although the company has not yet reached profitability, its results show positive progress while it waits to bring other products to market.
In short, and in my personal opinion, Navidea’s falls are buying opportunities, always with the long term in mind, as it is a small pharmaceutical company with room to grow.
Featured image: futureatlas.com, CC BY 2.0, via Flickr.
