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Investing Specialists

Thanksgiving's Over, but These Investments Say 'Gobble Gobble'

Fairholme and Bank of America are Morningstar.com readers' top turkeys this Thanksgiving.

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Are you still working through the turkey leftovers from Thursday's Thanksgiving repast? Don't put away grandma's recipe for turkey tetrazzini just yet because there's another helping of the big bird on the way. I recently asked Morningstar.com users posting in the Investment Basics forum of Morningstar.com's Discuss boards to share their portfolios' biggest turkeys--losing holdings they've dumped or at least wish they had.

Posters shared a broad swath of mutual funds and individual stock holdings that they'd put under the "turkey" banner. Many posters noted that their laggard holdings had seemed "too cheap to sell," but they went on to fall further still. Several posters noted that their losers had been valuable because they'd made them better investors along the way.  

To read the complete thread or chime in with a regrettable holding of your own, click here.

The (Once) Hot Fund Syndrome
 Fairholme (FAIRX), the topic of a lengthy thread last month (as well as an accompanying article), was at the top of many posters' lists of laggard holdings. (Morningstar analyst Kevin McDevitt recently provided his take on the fund in this article.)

Stockvapors quipped, "Fairholme is the toasted turkey this year. It was my favorite, but I guess all good things must end sometime. I'm sure [it] will rise again, but, as a recent retiree, the [risks] are just too high risk for me now."

Wartybliggins noted that he's partly responsible for Fairholme's negative impact on his portfolio, writing, "It turns out that I have been into every hot fund there is and have either flown away in time or had my feathers singed by these smoldering white dwarfs. The nadir was thinking that Fairholme and  Janus Overseas (JAOSX)  were the only funds I needed to own. I'm the turkey."

Yet not every poster was willing to throw in the towel on Fairholme. Rathgar, who also was ready to take  Hartford Capital Appreciation (ITHAX) to the turkey farm, wrote, "[These two funds] also own the out-of-favor stocks so they could be next year's winners. Both of these funds have seasoned managers with great long-term track records and held up very well in the 2000-02 correction."

Poster jbp57 is also standing pat with Bruce Berkowitz's financials-heavy portfolio--as well as other holdings, "I cannot find any turkeys in our portfolios (and yes, that does include some small positions in Fairholme). I tend to believe that in this unusual and erratic market climate the perceived turkey du jour may become the eagle of tomorrow--ergo, we are standing pat."

TNTand3 does consider Fairholme a turkey but notes that its recent losses haven't been too alarming because it wasn't a core holding. "I'm keeping [Fairholme] despite all arrows pointing at exit mainly because it's too late to pull the trigger, and long term it still holds up. Fortunately, I never saw it as a core holding, so it's not."

Yogibearbull, meanwhile, was feeling much less charitable, counseling investors to consider selling Fairholme, book a tax loss, and move into a similarly positioned investment. He wrote, "Because Fairholme is mostly in financials now, you can sell it and immediately buy the financial exchange-traded fund  Financial Select SPDR (XLF). Then after 30 days (or even later), you can get back in Fairholme (if you still like it). Then, you have a tax loss that can offset any capital gains, and beyond that, $3,000 in ordinary income. The unused tax-loss can be carried over to future years."

'It's Been Flightless'
Although Fairholme received repeat mentions, a grab-bag of other mutual fund holdings received the "biggest loser" designation.

NYbiker wrote, "Squawking loudest are  Bridgeway Agressive Investors 1 (BRAGX) and  Fidelity Diversified International (FDIKX). I already dumped  Mulhenkamp (MUHLX), which was gobbling, too."

Another Bridgeway fund topped weiwentg's laggard list, the similarly managed (and similarly abysmally performing)  Bridgeway Aggressive Investors 2 (BRAIX). This poster wrote, "I keep thinking [manager John] Montgomery will bounce back as well, but [it] has been in the bottom decile for the last two years."

Scoot124, like wartybliggins, is ruing an investment in Janus Overseas; scoot is also disappointed in  BlackRock US Opportunities (BMEAX). In addition, this poster notes that  iPath DJ-BUS Commodity Index ETN (DJP) could also be on the chopping block soon.

ChrisL, like other investors who have been dumping the firm's funds in recent years, isn't happy with his American Funds, including  Capital World Growth & Income (CWGIX),  EuroPacific Growth (AEPGX), and  International Growth & Income (IGAAX). "[They] have had a lot more downside than upside. I've been thoroughly disappointed in the American Funds group underperformance. I bought them in October 2009, and I'll be looking to sell before the market drops out at the end of the year." (Morningstar's analysts still like the firm and its funds, though, recently awarding six of the family's funds with a Gold designation, the analysts' highest rating.)

For oldstockman,  Leuthold Core Investment (LCORX) has been his portfolio's biggest disappointment. "For a fund that's heavily in cash and shorts," he noted, "it doesn't offer much downside protection, and it's been flightless in rallies." 

Yet academic points out that even when funds are bad, it's hard to fall harder than the once-highflying Van Wagoner Emerging Growth did. That now-defunct fund dropped 21% in 2000, another 60% in 2001, and a whopping 65% in 2002. Academic opined, "Nothing I own today has a gobble factor even remotely comparable to that. (Knocking on wood right now.) So, I have something to be thankful for." 

'It Continued to Crash to New Bottoms'
Just as Fairholme was the most frequently cited fund that investors wished they didn't own, so was one of its biggest holdings,  Bank of America (BAC), often mentioned as a disappointing pick for many holders of individual equities.

Pirate noted (with more than a little disgust), "The previous management 'team' destroyed the company yet they walked away with millions."

Peter5 also rues his Bank of America position as well as a stake in  General Electric (GE), writing, "Bank of America has been a turkey for me. I'm down 58% after averaging down, so now comes patience. The other turkey is GE--down 73% from my purchase price. Both BofA and GE have always been a small percentage of my accounts. I'm very fortunate to have had very few turkeys over the years."

Rossinator noted that taking hard knocks from various financial holdings taught a lesson or two about when to cut and run. "I was a savvy buyer of New Century Financial." [The subprime mortgage lender was eventually delisted by the New York Stock Exchange.]  "This was after it had dropped hard a few times and couldn't drop any lower. I rode it all the way into bankruptcy and ended up writing off the 100% loss on last year's tax return."

Rossinator went on, "The other more insidious one was Countrywide. Again, I bought it after it had crashed, a couple of times. The only problem: It continued to crash to new bottoms. I added more money but to no avail. Then, when Bank of America bought it out I thought I was saved and bought more BofA. Although it did come back a little, I lost more than two thirds of my investment. I will say from that experience I painfully learned to keep one eye on the macroeconomic environment as that seems to be able to trump any existing valuation attractiveness."

'I've Seen Enough'
Telecommunications stocks also received repeat mentions from disappointed investors. Raymonaa and blindguy both regretted owning shares of  Frontier Communications (FTR).

Blindguy had initially decided to be patient with his small stake in Frontier, which he received when  Verizon Communications (VZ) sold its land-line assets to the firm. But after watching the firm shed a third of its value so far this year, he has concluded, "I've seen enough, and it will become a tax write-off before the end of the year. Lesson learned: Be wary of high-dividend paying companies such as traditional phone/communications providers."

Chawks, meanwhile, has been disappointed in another telecommunications firm,  Sprint Nextel (S), noting, "I acquired the Nextel stock as part of an employee stock purchase plan way back when I worked for Nextel. Every year since the merger I have decided that there is no reason to sell my Sprint stock because the share price couldn't possibly go lower than it is now and at worst it will be flat this time next year. I know that I was wrong all of those other years, but this year is different. Really, it can't possibly go any lower than it already has so I'm going to hold onto it one more time."

In addition to the disappointing financials and telecom names, stockholders also cited a grab-bag of other holdings as particularly disappointing.  Chesapeake Energy (CHK) made the turkey list, as did  Applied Materials (AMAT),  Exelon (EXC),  Fuel Tech (FTEK), Krispy Kreme Doughnut (KKD), and Safeguard Scientifics (SFE).  Hewlett-Packard (HPQ), which has suffered from a number of management miscues this year and has a shriveled share price to show for it, also made more than one turkey list.

Yet losers can be valuable in their own way, particularly if you learn to become a better investor. For several posters, the main takeaway from their losing holdings was that you can be too patient.

Dragonpat, whose biggest disappointment was  Intel (INTC), is one such investor. She noted, "I thought I bought it at basement rates in 2000, but I did not realize that the basement was a lot deeper than I imagined. I was getting rid of capital losses for three years after that."

Paul_Small, who had a similar misadventure with  AMN Healthcare Services (AHS), wrote, "The trick is knowing when to eat your turkeys. Eight months after my first purchase (and following a disastrous acquisition by management), I realized that my original thesis was broken. Instead of waiting for AHS to recover, which it did in 2011, I sold early at a 40% loss and used the money to purchase investments that recovered my original cost much more quickly than waiting for AHS to come back to me."

He went on, "The moral: recognize when you have bought a turkey, eat your losses, and invest more productively. It is not a mistake to buy losing investments. That's inevitable. It is a mistake not to recognize your mistakes and move on."

Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.