How and Why I Held Onto a Tanking Stock — And What Happened Next

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For the dual purpose of becoming a better investor and giving my readers ideas on how to invest, I have been participating in an investment competition entitled the Grow Your Dough Throwdown. The contest is the brainchild of Jeff Rose, a Certified Financial Planner who runs his own practice and shares his thoughts on personal finance at Good Financial Cents.

The rules were simple: Invest $1,000 at the beginning of January 2014; write about your selections; and report your progress to fellow participants on a monthly basis. The winner will be the investor-blogger who has the largest account balance at the end of the year; the prize will be bragging rights.

Here's what's happened to my money, so far.

I Bought Shares in a Growth Company Based on an Expert's Advice

For my entry, I decided to test investment strategies accessible to the average investor. One of my selections was a stock recommended as one to "own forever" in a free report available publicly by The Motley Fool: LinkedIn. (Note that The Motley Fool also publishes subscription-based newsletters offering private, paid insights.)

At the beginning of January, I purchased 4 shares of LinkedIn for $208.00 and held the remainder in cash.

Unfortunately, the Price Fell — a Lot — After My Purchase

Soon afterward, the price fell.

So, I bought more shares at an even lower cost for my personal investment portfolio. Depending on which expert you trust, such a move is either brilliant because purchasing additional shares resulted in a lower cost per share for this holding, which could lead to higher returns when (and if) the stock price recovers, or foolish because I am trying to justify my earlier poor decision by plowing more money into a losing investment.

Then, things got worse. The price plunged. Shares went as low as $142.33 on May 6, 2014. (If you want to see the price fluctuations, go to Google Finance, look up NYSE:LNKD, and select the YTD view.)

Fortunately, I Have Experience With Downturns and Holding Shares for the Long Run

At this point, I wanted to hide my loss. I felt uncomfortable and anxious about having to come clean with my mistake when I filed monthly reports of my investing progress. Privately, I rationalized that my selection was simply part of an investment experiment as I explored various strategies.

Eventually, I realized that it was silly to be concerned about such a small portion of my portfolio; what really mattered was my overall net worth, which was improving with the market's growth.

Mainly, though, I chose to ignore this sad turn of events. I reported my performance to my Grow Your Dough Throwdown competitors but didn't mention my frustration, annoyance, or embarrassment.

Ignoring stock market fluctuations is a coping mechanism I have learned through various downturns. In the early 2000s, for example, I filed away brokerage account statements unopened; during the most recent recession, I paid little attention to my investments on a daily basis. This approach is not necessarily smart but it's effective in avoiding fear and panic.

I thought about selling LinkedIn and replacing my selection with a better pick but decided against this course of action for a couple of reasons. First, I wanted to test this investment experiment from start to finish; if The Motley Fool recommended the stock as one to own forever, then I was going to own shares for at least the duration of 2014. Second, I had no idea how to replace this selection and stay true to my goal of evaluating strategies accessible to the average investor.

The Company's Future Looked Promising and Shares Were Fairly Priced

Further, I believed (or naively hoped) that the stock was in fact a good choice. This selection surfaced as a possibility because of The Motley Fool mention; but I purchased shares because my evaluation suggested that the company was well-run and its shares were priced at a discount.

Specifically, these were the characteristics I liked:

1. LinkedIn has a wide economic moat; that is, the company seems to have a unique service that is difficult to duplicate. And even if another business could create a business networking site, getting members to join and connect with yet another social media outlet would be challenging.
    
2. The company has a positive cash flow and growth. When I reviewed the company's financial statements, I was impressed with its cash position. The firm seemed to be generating a profit and leveraging its digital assets, rather than spending outrageously in order to grow.
    
3. I like, use, and recommend the company's services. Journalists, recruiters, and other professionals have connected with me through LinkedIn, and provided me with opportunities to expand my professional presence. Friends have mentioned the site's usefulness in conducting a job search.
    
4. The company has a great suite of products. LinkedIn is particularly valuable for recruiters and representatives of hiring organizations, who are generally willing to pay a lot of money to get access to talented people. Plus, the company is expanding its geographical presence.
    
5. The company's stock price seemed fairly valued when I made my purchase, according to my calculations based on cash flow projections. I believed the company was worth more than $208.00 per share and the price would rise further.  

I Have Learned More About Growth Investing

While I hung on to LinkedIn for lack of better choices, a funny thing happened. The share price went up; it went way up. As of today (11/13/2014), its per-share price is $233.50.

What I learned from this experiment is that share prices of growth stocks experience significant fluctuations as investors decide how to value the company. My advice is that if you want to invest in growth stocks, do your homework, buy shares when they are priced below your valuation, be prepared for a volatile ride, and stay invested even when things look bleak.

Now? I wish I had picked up more shares at $142.33.

Disclosure: I own eight shares of LinkedIn (LNKD).

Have you held a tanking stock only to see your decision vindicated? Please share in comments!