How to Survive the Fall of Tempur Pedic

By Quint Tatro  JUN 07, 2012 3:50 PM

If you owned its stock, the loss is downright sickening. And though you may not recoup losses, you can reposition for the future. Here's how.

 


MINYANVILLE ORIGINAL When it comes to Central Kentucky we can be pretty darn proud of our Wildcats, our ponies, and our bourbon. There are, of course, some kings of commerce located in the Bluegrass that have recently fallen subject to the market guillotine.  As an investment manager who has witnessed stocks fall from grace on numerous occasions, my heart truly goes out to those holding significant portions of stock in their 401( k) or retirement plan who had no idea that something so drastic was about to happen. Truth be told, no one did, and now anyone holding the stock of Tempur Pedic (TPX) is left holding the bag, feeling pillaged, asking themselves, “What just happened?” and more importantly, “What do I do now?”

Tempur Pedic has dropped from a high of $87.43 to the low $20s in less than two months. The first drop was a result of poor earnings while the second this week was a result of the company cutting guidance and the market responding with extreme pessimism.

Whenever something like this happens to an investor -- and if you’ve been in the game longer than a cup of coffee it’s happened to you -- there are a few key things to consider and proven methods to get "unstuck" from this event, which I’ve outlined below. No, they won’t recoup the losses, but they’ll help you to reposition so you can in the future.

1. Avoid the zombie-like state. It’s easy to stare at the computer quote every day wondering just what the stock is doing and whether or not it’s bouncing back or heading lower. This doesn't help, and it will not only zap the productivity from you, but it will take you on an emotional roller coaster through the ups and downs.

2.  Avoid the "double down" theory. This can be very tempting, especially if someone has been involved with the company for many years. The belief about the future of the company overcomes any real "reality" and the desire to "get it back" by adding to the position is considered. Sure, sometimes this works, but more often than not it simply causes more pain and it is an unnecessary risk to take. If the stock begins to improve, you’ll know it and you can add shares then. There is absolutely NO rush.

3. Revise your plan with the new stock price. Odds are you’ve been calculating retirement based on a healthy Tempur Pedic stock price in the 80s with maybe even a healthy percentage of growth factored in each year. It’s easy to just throw up your hands and say "I’ll now never be able to retire," but after the initial pain of the drop wears off, it is better to revisit your financial plan and recalculate the plan with the new low 20s stock price. Should the stock begin to appreciate again, it will be gravy, however this will at least give you a real projection of what the future looks like.

4. Sell some. I am not sure why but people fear selling stock at all cost. They fear selling when a stock is strong as they fear missing out on more upside. They fear selling a stock when a stock is weak for fear of missing a bounce. This fear is what creates the zombie-like state which results in no activity at all. I do not believe Tempur Pedic to be like some previous stocks that have fallen from grace never to return, however I can remember vividly having the same conversations with holders of stocks like Bear Sterns and Lehman when they began their descent. The thought of selling any after such a decline was ridiculous and I was even berated for mentioning such an audacious thing. (Sigh. Had they only lightened up.) No, I’m not suggesting cashing out entirely and writing it off, but if you find yourself panic stricken and glued to the screen every minute of the day, it’s probably time to cut back on some shares and at least sleep better knowing you’ve protected some capital.

5. Use stops. Most people wouldn’t dream of riding in a car without a seat belt or owning a house without fire insurance, yet when it comes to investments, they will not place a stop for protection in the event catastrophe happens. Losses will occur; if someone says they can make you money with no fluctuation or losses along the way, run the other way, however losses must remain manageable and can only do so when stops are placed and stops are taken. When an investment -- whether a stock, a mutual fund, or whatever -- declines to a specific level that you decide ahead of time, an order is placed and it’s sold. There are no questions asked and no arguments. Maybe you had stops on Tempur Pedic now and you’re thankful you did. If you didn’t it’s time to brush up on this for the next time.

6. Diversify. Many who read this will have no position in Tempur Pedic at all and may be looking to play a bounce from here, as I am, or are just curious what someone would say about a stock that recently blew up. Rather than pass this off as something that doesn’t apply to you, accept this as a free lesson. I have seen this a hundred times and will probably see it a hundred more -- regardless of who you work for or how much you believe in a company, diversification is key. It’s key to diversify when the stock is headed up, and when it gets silly to the upside it’s important to sell into strength. You wouldn’t put all your eggs in one basket in any other venture, and you shouldn’t do it with a company stock. I’m a firm believer in owning company stock but only as a piece of a diversified portfolio.

Living in the Lexington area my heart sincerely goes out to those hurting from this stock’s decline. I personally believe the selling to be extreme and overdone and it's why I took some shares to support the cause. It’s a trade for me and won’t be on the position sheets very long, win, lose or draw. Trading is what I do, and I’m accustomed to the risk. If you’ve been in, the loss is annoying, frustrating, and downright sickening. If you’re in this camp take a deep breath and remember this too shall pass and brighter days lie ahead.
Position in TPX