Repeat after me: There is no such thing as a widow-and-orphan stock.

One more time for emphasis: There is no such thing as a widow-and-orphan stock.

Wikipedia defines a widow-and-orphan stock like this:

In stock markets, a widow-and-orphan stock is one that reliably provides a regular dividend while also yielding a slow but steady rise in market value over the long term. As such, this type of stock has traditionally been an attractive investment for retirees — in some cases actually widows — as well as for professional investors managing trust funds for orphans.

 

The foolish notion behind the concept is that this is a stock that you don’t have to worry about, you never have to sell, and you can buy large amounts and sleep soundly no matter what. It’s foolish because there is no such thing as a truly safe individual stock investment.

Are there stocks you can buy with a high degree of confidence? Of course. Are there high-quality companies you can hold in your portfolio for years on end, even decades in some cases? Absolutely.

There are great investments that can maintain green zone trends for five to ten years at a time — or even longer!

But there is no such thing as an individual stock you can hold no matter what, because it is always possible something can go wrong. There is no such thing as a bulletproof company, industry, or market sector. Responsible stewardship of capital means staying aware of this.

The case in point here is General Electric (GE).

If ever a widow-and-orphan stock existed — a steady riser and thick-and-thin dividend yielder, with high-quality management and a pulse on the finger of American business — it was General Electric. It is one of the oldest Fortune 500 companies in history. It was founded in 1889, with ties to the brilliant inventor Thomas Edison. It became part of the Dow Jones Industrial Average in 1896 and held a streak of never cutting the dividend for more than 70 years straight.

And yet consider this: The stock is now a disaster. General Electric has shed more than $500 billion worth of value since the year 2000. As Bloomberg has pointed out, that is like losing the value of Facebook.

The stock performance of GE has been more than horrendous. In the past two years, GE’s stock has declined roughly 60 percent — in the middle of a raging bull market! (Talk about adding insult to injury.)

So, what the heck went wrong at GE? There are huge volumes of analysis and lots of informed opinions:

  • The prior CEO, Jeff Immelt, made too many expensive acquisitions.
  • There were hidden problems left over from GE’s financial units (and a history of financial wizardry that blew up in GE’s face).
  • Operations got too complex.
  • The leaders fell out of touch.
  • Management drowned in bureaucracy and red tape.

On and on it goes.

Whatever the reason, the price performance of GE — down 60 percent in the midst of a big bull market — is exhibit A for what we are saying.

Now General Electric is replacing its CEO with yet another CEO. The one they just fired had only been on the job for a year, but apparently wasn’t turning things around fast enough.

Will the new CEO get the job done? Maybe. Maybe not. Some analysts are optimistic, but others are worried about what’s happening behind the scenes. It’s possible GE’s internal problems are far bigger than anyone thought.

For all those swirling questions, what we can say with certainty is that, at one point in time, GE was a respectable high-quality investment. And now it’s not. And it might not be again for a good long while, or ever.

The world is too complex to give any investment the benefit of the doubt, no matter what. Even the best-run company in the world — and for a long time, GE was considered exactly that — can stumble badly or even fail to survive.

This reality — the fact that no individual stock investment is “safe” — presents a conundrum for investors.

How do you behave with maximum rationality as an investor, which means holding your best investments for months or even years at a time, sometimes a decade or more, while at the same time avoiding disasters like GE?

How do you protect yourself against a good stock turning bad or a winner stumbling and falling so badly that it burns up your investment capital, even though the stock was supposed to be “safe” and management was great?

Let’s take a closer look at GE. Below you can see the stock’s 10-year chart as you would find it in TradeStops.

General Electric’s 10-year chart displayed in TradeStopsb
Let’s say you bought GE in the aftermath of the 2008 financial crisis.

This would have been a logical move. GE was historically a high-quality stock, the price had been very depressed, and Warren Buffett had taken steps to help save the company with a multibillion investment in October 2008.

In September 2009, GE turned green. So far so good. The stock then proceeded to stay green with only minor excursions into the yellow zone (which are acceptable for a good investment) for six straight years!

If you had sold General Electric in 2015 when it turned red, you might have bought it back when it turned green again a short time later (as the chart shows).

To sell a stock and buy it back a few months later can be frustrating at times, but the risk management value of doing so showed itself in May 2017, when GE turned red and then stayed red for an absolutely devastating decline.

If a decline like that can happen to GE, it can happen to any company. That is why there is no such thing as a widow-and-orphan stock.

There are certainly investments that can provide excellent returns for years on end — and GE was one of them in the past. But all investments need the benefit of smart risk management, which the tools in TradeStops help provide.

Richard_Signature

Richard Smith, PhD
CEO & Founder, TradeSmith