How not to speculate

Today I'm going to talk about speculation.  Speculation is finding a typically low priced (below $10 per share) stock with the bet that it's going to jump big - double, triple or maybe even more in a short amount of time.  These are still meant to be investments, but sometimes can be a trade - just something a little more interesting that can help grow wealth quickly.  My selection in my current portfolio was Broadwind Energy (BWEN).  In 2010 with gas and oil prices high, I saw this as a pure wind energy play.  I knew initially it was going down and expected it to rebound as I bought it down.  Stock never really turned around though and I never let go.  I kept telling myself "maybe it'll get better next quarter."  That's not a good way to invest - especially in a speculation stock.  When things go bad, you get out immediately, no matter whether it was a loss to you or not.  And that was my problem.  I didn't want to admit defeat and take a loss.  So instead, I lost more.  It's a horrendous stock now.  Sure, it's turned around some since it's bottom, it's winning a few good contracts, and there is some upside to it now.  However, that upside won't get me to even any time soon.

There's a lot of lessons here that I learned in a way I wish I hadn't.

  1. Know your stock - that doesn't mean just knowing what the company does, what it's numbers look like and why you like the stock.  It also means knowing what drives the company to do better - is it secular, or cyclical - and what things can take the stock down.  
  2. Know your exit strategy - will you bail on the first bad quarter, or do they get a free pass.  What macro events would have an impact?  If it goes up like you planned, when do you start taking some of your cash out so you don't suffer losses on what you've gained
  3. Pride is a killer in the stock market.  You'll never beat it, it will only beat you.  Everyone will make bad choices and take stocks that end up being losers.  The difference between me and professionals is that they would've bailed a long time ago while I kept thinking I could beat it later.  This can and will apply to the up side too.  Just because you picked something right doesn't mean it'll never turn around (See my earlier posts on Honeywell).  Right and wrong isn't absolute most of the time in the stock market and the only time it is absolute is when the company goes bankrupt.
  4. I never did enough homework on this stock.  If I did, I'd have understood it more and it would've been sitting in the back of my mind just how badly they were doing. 
  5. Accounting irregularities (whether they be true or false) = sell - Before I got into stocks I watched a company by the name of Herbalife get called out for falsifying numbers and having them put under investigation by lawers (not the SEC).  That stock was up huge at the time and when this information came out, the stock got pummeled.  It lost half its share price despite consistent denials and positive quarterly results by the company.  When things finally calmed down and the accusers admitted there was nothing wrong, that became the time to buy the stock and it's been up huge again since. Similarly, Broadwind has been accused of improperly stating numbers and shifting things around to make them look better than they really were.  They are now under investigation by a number of various legal groups in class action suits.  This should've been an immediate sell signal, but again, I didn't want to take losses and thought that this would turn out just like Herbalife, where it just found that the facts were false and it would rebound.  The thing here is, why take the pain of the obvious hit the stock will take when you don't have to?  You can always keep it on your radar and buy it up after the accusations have been cleared.
So many things to learn. I'm looking to rid myself of this stock so I can place my remaining funds elsewhere. This is going to be a painful hit that will take time to right my portfolio in an already tough market.