Your strongest beliefs are tearing your portfolio apart.
You're biased. You like Apple iPhones, Nike sneakers, and Shake Shack burgers. In your world, the quality and value of these brands are unmatched by the competition. Of course, this also means their respective share prices can only go higher.
When you're emotionally attached to a company, it's easy to excuse a bad quarter, a botched product launch, or some other costly mistake. You see any setback as a temporary inconvenience. Your opinion won't budge - even when the story around your favorite investment changes.
We know what we're supposed to do. When the market sends us new information, our opinions should adapt based on the facts.
That's easier said than done. After all, we're only human. We can't simply turn off our brains and pretend as though we hold no preferences in our lives. We all have favorite foods, products, and brands. And we have a well-defined narrative in place that tells us exactly how our favorite trades will meet (or exceed) our profit targets.
But the story of most companies doesn't develop exactly as we expect. Fierce competition, new technology, and government regulations can all creep into the picture and change everything.
Our recent Facebook (NASDAQ:FB) trade is the perfect example.
Facebook was stomping the competition when we first took a swing at the stock for a longer-term trade back in 2016. No other company in the social network space could touch Facebook. You were either with them or you were on the losing side. It was that simple.
By the spring of 2017, Facebook could do no wrong and continued to push to new highs. At the time, I honestly thought Facebook was going to take over the world.
The facts were on my side. Facebook was consistently beating expectations and gobbling up new active users. The platform was becoming more than just a place to browse cat videos and baby pictures. Heck, even younger people who claimed to hate Facebook maintained active accounts. Facebook had already become the de-facto online identity for most Americans - and its influence was spreading overseas. I even thought Facebook could easily become the first trillion-dollar company, leaving Amazon in the dust.
Bottom line: If you weren't focused on Facebook, you were missing one of the biggest growth opportunities in the world.
That's just about when the market started hinting that the Facebook story might not play out as perfectly as we once thought...
The sentiment shift started off small. Media outlets that used to gush about Mark Zuckerberg's management prowess and Facebook's unwavering performance became more critical of the company. Then Facebook came under intense scrutiny for its failures to adequately vet false and misleading news stories on its platform during the 2016 election.
Facebook's sweetheart status was starting to unravel. That's when the floodgates opened. Facebook is now dealing with stories out-of-control online bullying and accusations that the site is destructive to users' mental health. Even former Facebook exec Chamath Palihapitiya went on TV to declare that social media is warping our brains and ripping society apart.
That's when I had to face facts. Facebook was no longer unstoppable. The stock was already falling behind its FANG brethren. With momentum slowing and some holes appearing in the Facebook narrative, we walked away from our Facebook trade
I'll be the first to tell you I didn't see this coming.
In fact, it would have been easy for me to shrug off these new developments and assume King Zuck and the Facebook juggernaut could easily ride out the criticism. But I had to ditch my strong opinions regarding the company and adjust my expectations. That meant selling the trade and watching from the sidelines for a bit.
For what it's worth, I think Facebook will be just fine over the long haul. I doubt the entire world will delete Facebook and dig up their old Friendster accounts to fill their social networking urges.
But I do think the company might have to deal with some short-term turbulence that could negatively affect its share price.
Time will tell if our hunch is correct. I'll be the first to admit that I'm not going to nail this trade perfectly. But I was prepared to change my view and act when the market handed me new information.
The most important part is behind us: The gains are in the books. Now we wait for the next big opportunity to come along...
Sincerely,