The Citibank Story — How to Deal with Stocks that Have Suffered Substantial Losses? Trying to Profit when the Stock Market hit Rock Bottom?

The Citibank story

In May 2007, Citibank’s stock is worth $460–470.

In Q1 2008, Citibank’s stock dropped to $250.

In 2008, here are what people were saying about Citibank:

It is an international company.

It is a bank.

It is stable.

When the price falls, we can buy in this good asset at a discounted price.

It is a big company (it won’t fall).

Citibank will not go bankrupt (even if it is in bad shape, the government will come in and save it)

Over long term, Citibank’s stock will rise.

You heard that and thought that makes sense.

Let’s assume that you did not buy Citibank’s stock at $460–470, instead you buy it almost 50% off at $250. And at that time, it seemed like you are such a wizard. The stocks look like such a bargain — that you now hold an international bank at half of what it is priced.

And what if it will continue to fall? You said it is fine. Because you are confident that stocks will rise over time (showing the historic data of how S&P generally grows 8–10% on average each year for the last 100 years) and your strategy is to buy and hold for long term (like Warren Buffett). You can afford to wait because you invest with your idle money.

What happened next?

In Oct 2008, Citibank’s stock only worth $110.

Now, the question is: would you sell at $110?

“No I won’t. What if it bounces back afterwards? Warren Buffett would not go and check the price volatility. He would just buy and forget about it — maybe I should do the same. After all, no crisis lasts forever. It will rise soon after this crisis is over. I will wait for the profit.”

At this time, even though the stocks is at a loss (of more than 50% because you bought at $250 and it is not $110), but you could still be filled with hope and expectations. Because you know that previously it was $460–470. Because you think that this is an international bank. It is a big, stable company that would not fall.

And perhaps most importantly, because we are all reluctant to admit mistake.

So we may go and ask for comments and advice from other people, e.g. looking at reviews on Citibank’s stock by some ‘stock experts’ whose names we have not heard before, watching some youtuber talks about this stock (without knowing whether they really personally invest in it or not and did not know whether their views are right or wrong).

At this time, we wanted to find evidence to support that we had made the right decision to buy the stock at $250. We wanted someone to confirm us.

Responsibility — the word that no one likes

And perhaps most importantly, we want to put part or all of the responsibility on others. If eventually we loss money, we can say “I should not read that magazine with stocks recommendations.”, “I should not follow the advice by that stock analyst”. Such that we can escape the responsibility of our own financials.

But wait, isn’t that the same reason that got us into this mess in the first place? Why did we buy the stock at $250 then? You heard that this is an international bank, that it is stable. And that when the price falls, we can buy in this good asset at a discounted price. And thought that you bought at such a bargain (almost 50%) at $250.

If you put the blame on someone else for your financial mistake or misjudgment, you will never learn or improve.

Every decision to buy or sell must be your responsibility to bear.

Let the story continues…

Assume that you did not sell at $110 because you strongly believe in Warren Buffett’s value investing approach to buy and hold for long term (in which case, you may be putting the responsibility on Warren Buffett — if you lost, you may have a case to show that value investing doesn’t work).

Or you did not sell because you believe that Citibank is an international bank that would not fall and you can wait until its stock price rises again.

Whatever the reason was, here was what happened next…

Despite a minor bounced back, Citibank’s stock further fell significantly to as low as $8.89 in February 2009.

In hindsight…

If one has the benefit of hindsight, would you sell the stock at $110? Emotionally it would be very hard even with hindsight, because you bought it at $250. And selling at $110 would mean you are realising the loss for more than 50% — the loss becomes real. And the pain becomes real.

And if you had decided to sell at $110, seeing the little bounce back will fill you with guilt and remorse. And the next time you invest in any stocks, you will not sell even seeing the definite downward trend.

Now at $8.89…

The question is: would you sell at $8.89?

Do you still think that this is a stable international bank now? Do you still believe in buy and hold now that the stocks have lost almost 98% of its value? Do you still have confidence that it is too big to fall?

Assume if you decided that it could not go down further (even though time and time again, it has proven to you that it can go down further), and it bounced back to $30 from $8.89.

Would you sell at $30 (don’t forget you bought at $250)?

Most likely, you would not sell at $30 — because it is human nature to think that you were right. You have waited so long for this stock to bounce back. Now finally the trend is in your favour, the stock is bouncing back (even though not to your original price yet). If you continue to wait, one day the stock will bounce to $250 and more.

If you have some idle money left still, you may even buy more to dilute the loss and to lower your average price. Now the stock has started to move in the ‘right’ direction, your confidence is back. And the upward trend has given you some more confidence.

The lesson

In a bear market, a stock can lose 80% of its value after losing 90% of its price. A company as big as AIG can disappear in a bear market.

Never underestimate how low a stock can go.

If you are holding a stock that has suffered significant loss now, chances are it will continue to fall based on momentum. Any 30% drop started with 5% fall. And any 70% drop begins with 30% fall. And any 90% drop were 70% fall before. One never knows — any stock can become worthless in a bear market.

If you continue to hold such stocks and refuse to admit the mistake, cut loss and move on, you could be burning money and trapping your precious hard-earned or hard-saved money in an ‘asset’ for many years, hence losing out on opportunities of investing in other stocks or financial products that may help you to make the money back.

Going back to the Citibank’s stock, if you sell the stocks at $110, even though you are losing more than 50%, you are saving on more than 90% of capital (from $110 to $8.89). If you use the remaining money to buy Netflix. At that time, Netflix was only around $5. Thereafter, Netflix rises to $40 in a few years. Up until the date of this writing, Netflix is worth $362.99, which is more than enough to make the money back (in fact, you are making more than 700% return).

Compared it with if you still do not cut loss and continue with the mistake, Up until the date of this writing (March 2020 which means more than 10 years later), Citibank stock is only worth $46.02 (i.e. you are still losing more than 80%).

What have you learnt from this Citibank’s story?