I don't watch Game of Thrones, but I have plenty of friends who were shocked with this past weekend's Red Wedding episode.
Several popular characters perish, and I'm not about to play spoiler and tell you who they were. Spoiler alert: I don't know who they are. Really. I told you that I don't watch the show.
However, this got me to thinking about portfolio management. Just as fans grow attached to certain characters in their favorite shows -- only to struggle with letting them go when they perish -- investors go through the same process. That's a problem, because people who form emotional ties with their investments wind up holding on to the stocks for longer than they should when things start to sour.
Every portfolio needs purging. Every collection of stocks needs to be weeded out.
Let's start with Cliffs Natural Resources . The iron-ore miner has shed more than half of its value this year. Commodity prices have been weakening, making it harder for the extractors to make the kind of money that they used to. When Cliffs reports quarterly results next month, it won't be pretty. Analysts see Cliffs earning half as much as it did a year earlier on a double-digit dip in revenue.
Should investors have seen this kind of carnage coming? Absolutely. Cliffs fell short of profit expectations every single quarter in 2012.
Source: Thomson Reuters.
Why would investors be holding out hope for a strong 2013 when 2012 was a perpetual disappointment?
Apple is another stock that has been spared for emotional reasons. The iPhone is cool. The iPad is great. Folks bought in when Apple was routinely posting double-digit growth, but how many of those bulls are aware that profitability is expected to take a double-digit percentage decline this fiscal year?
Personally, I'm not ready to slay Apple. I believe that it will create the new product categories that lift it out of this rut. However, the nearly 40% slide since peaking late last year hasn't come as a surprise as Wall Street continues to lower its expectations on the consumer tech giant.
Every portfolio needs a Red Wedding. Every investor needs to assess stock holdings from an unbiased perspective. You won't always get it right, but eliminate the emotional attachment and you'll recognize it as a necessary step for the plot -- and your portfolio -- to evolve.
Make smart moves in battle
With so much of the financial industry getting bad press these days, it may be a "be greedy when others are fearful" moment. Not surprisingly, some of Warren Buffett's biggest investments are in the space. In the Motley Fool's free report "The Stocks Only the Smartest Investors Are Buying," you can learn about a small, under-the-radar bank that's too tiny for Buffett's billions. Too bad, because it has better operating metrics than his favorites. Just click here to keep reading.
The article Every Portfolio Needs a "Game of Thrones"-Style Red Wedding originally appeared on Fool.com.
Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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