Uppercut to an emotional investor

Posted: January 29, 2013

MY DUMBEST investment was when I bought shares of Ambac Financial. It turned out to be my best lesson on the dangers of "emotional investing." I thought I was catching it on the upswing, but I ended up getting an uppercut instead, as it fell faster than I could regain my balance. I quickly realized that the market reacts much faster than I can, and that a sure-footed investment strategy is a much better plan.

- T., online

THE FOOL RESPONDS: This bond insurer ran into trouble in 2007, largely due to involvement in mortgage-related securities, and filed for bankruptcy protection in 2010. As is often the case, many people bought shares as they fell, not imagining that the shares could fall further.

It's true that some stocks plunge and then recover well, rewarding shareholders. But many do not. If a company runs into trouble, consider steering clear. If you're still considering it, make sure that its problems are short-term and not likely to be long-term. Ambac hurt shareholders along the way by issuing more shares in a desperate attempt to raise money and stay afloat.

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