When Something Goes Wrong: The Case Of JP Morgan Chase

Managing your investments would be easy if you just bought stocks and watched them move higher.
 
In your dreams!
 
In the real world, even the best managers must deal with adversity. Our choices, no matter how carefully chosen, do not perform as expected. Something goes wrong.
 
Dealing with adversity is crucial to investment success. Tonight we have an informative case study in JP Morgan Chase (JPM), a company that I have cited favorably several times and include in my flagship investment program. My most recent favorable mention was just this week in my discussion of Europe.
 
While it is more fun to write about triumphs, it is just as important to think about losses. Despite my overall record, I certainly make choices that do not work out. I do not endorse "buy-and-hold." I actively manage every program and every position, constantly reviewing the changing prospects for each investment.
 
Let us take a closer look at how to handle adversity.
 
What NOT to Do
 
There are two basic investment mistakes -- mirror images of failure to analyze.

1. Blindly holding the position hoping that it gets back to your original "buy" point. This is typical for the average investor. It is about psychology rather than analysis. It is buyer's remorse, a desire to undo the losing decision. "If only I had another chance.....,"  the investor thinks. This is really stupid. If the investment is a mistake, this mentality can turn a moderate loss into a  big one. Some of the biggest companies have gone to zero -- or nearly so. Check out Worldcom, Enron, GM, Lucent, and many others. Meanwhile, if the stock actually does recover, it is probably wrong to sell it at the original entry point.
2. Selling instantly and without analysis. This is a trader mentality, which is fine if you are a trader. We have all heard about cutting losses and letting winners run. We also know about "buy low and sell high."  It is more difficult than a slogan. I listened to some traders discussing this stock and they opinions were mixed.

1. It must have a great  business, with strong profit potential.
2. There must be strong management.
3. There must be a near-term catalyst, since no one wants to have "dead money."
4. Corporate financials  -- earnings, cash flow, balance sheet, and risk -- must all be strong.

1. Is this still the premier financial business?  Do I still want some exposure to the sector?
2. Have I lost confidence in Jamie Dimon?  On his show tonight Cramer (long the stock in his charitable trust) announced that Dimon was "just like all of the others."  This might be a little harsh, but I have relied on his interviews where he assessed overall risk. Were these misleading?  Mostly they discussed counter-party risk, but I need to look deeper.
3. Has the potential catalyst changed?
4. What about the new financials?  The question is whether this is a one-time hit or something that affects future operating earnings. In my experience there have been many "one-hit wonders" where stocks decline on bad news that is a one-time charge (Tylenol poisoning, Intel floating point processor). The market sells first and thinks later. The overall earnings picture before the news was very good, as we can see from this chart from Chuck Carnevale's invaluable site.