Falling in love with a company, its services or its products is well-known to cause its stockholders more financial harm than good. Avoiding this trap is a common advice. And it's a good one.
A Concrete Example
As a real past example, let me tell you about when I invested in Jamba Juice (JMBA), the smoothie shop that is so ubiquitous and keeps expanding. I thought the concept was great. After all, being from Brazil, I know how popular freshly-squeezed fruit juice and smoothies are over there. The fact that Jamba was aggressively expanding outside of its home state of California was a big plus.
This was back in 2005, and I had just discovered Jamba Juice. I immediately fell in love with the idea and wanted to invest in it. But Jamba was a private company back then and all they gave me was a discount coupon when I offered to invest some money into the company. Silly me.
So I waited for its IPO and then waited some more for the post-IPO hype to die down. In 2007, I finally decided to buy, based on its expansion plans, and a lot of excitement about its products and business model. After all, who wouldn't want to buy a Jamba Juice smoothie?
Price paid: $6.49 per share in 2007.
Current price: $2.37.
Maximum price in the last two years: $3.83.
Dividends paid: $0.
Now you do the math.
What went wrong? First, I didn't stop to analyze the market. I assumed everyone must love smoothies. But it turns out that outside of California, Hawaii and Florida people don't care as much about smoothies. Moreover, only during the summer months do people care enough to look for Jamba's colorful stores. Also, Jamba's expansion plans were so aggressive and it expanded so quickly that it had to close some poorly-performing stores, hurting the bottom line.
And how could this business model be so popular in Brazil? Despite the weather differences, juice and smoothie shops in Brazil typically freshly squeeze their fruits in front of customers, while Jamba mainly freshly blends fruit concentrate with a sugary "dairy base", according to their own in-store information.
I took my losses on JMBA today, after keeping a shred of hope for the last 3+ years.
Conclusion: it pays to look beyond products and services before investing. Look at the market, management quality, financial situation and company expansion plans.
Avoiding a Current Trap
With the lesson learned from Jamba Juice, I recently avoided a similar trap.
I'm a big fan of Vitacost, my supplier of vitamins, herbs, protein, etc. Their products have the lowest price, they ship super fast and their customer service is great. In fact, over the many years I've been using them, I've only had two minor problems with shipping, which they resolved so quickly and satisfactorily that I even wonder if they caused the problem on purpose so that I would fall in love with their speedy customer service.
Sounds like an ad for them, right? But I'm in no way affiliated with them. And that's for the betterment of my pocket.
You see, I wanted to invest in Vitacost for a while and like with Jamba Juice, it was still private when I first thought about investing in them. Today, I discovered that they've been public since 2009, ticker VITC. So I started looking into a possible investment.
Even before turning to their financials I find a slew of terrible news about the company. First, it failed to file for the required paperwork with NASDAQ and it is at risk of being delisted. The CEO has left recently, and it is postponing its shareholder meeting. Worse, it's being sued by not one, but three law firms for security irregularities. Something about its executive team having allegedly lied about its products, services and financial strength to mislead investors into a higher valuation.
Of course, all the bad news could mean that the stock price is depressed and when things are resolved this could be a terrific opportunity to buy. However, for a company with such short track record and with so many problems accumulating right out of the gate, I can't even start considering an investment in it.
I will continue to enjoy Vitacost's good product selection and quality service. But I'm not buying any piece of the company any time soon.
The advice "don't fall in love with your stock" is a good one. Treat all your investments as anonymous machines working for you. If they fail to work for your best interests, it's time to replace them. There's a large pool of good ones out there. All you have to do is do your due diligence, look at the fundamentals and choose carefully.
Disclosures: No position in any of the above mentioned securities as of the time of writing.