Investing Lessons from BlackBerry, How to Avoid Losing Money in Stocks

As everyone knows by now, there is an offer to buy BlackBerry BBRY on the table.  The deal is still questionable, as the lead buyer is Fairfax Financial Holdings Ltd. FFH, who already is the largest shareholder of BlackBerry and is seeking to raise the funding required.

Leaving aside whether or not the deal will get done, this brings to a close a sad story. The former market leader, dominant in the mobile phone industry, brought down to the level of begging someone to buy them out before it's too late.

It's also a lesson to investors, as many have lost millions of dollars making poor decisions over the past few years. Looking at BlackBerry is a great case study for investors, where did people go wrong? How could you have been a better investor in a stock like BlackBerry?

Lesson #1 - Fundamentals Don't Lie

At the core of every investment is a company or asset. You need to get beyond the idea that investing and trading is simply gambling at a casino, it's not. Yes, there are risks, but these are business risks.

To understand this fully, realize that when you buy into a company you are a part owner. If you were to invest in a local bakery, would you simply ask the price of ownership versus the price last week or would you spend more time in understanding the actual business of the bakery?

While the answer seems obvious in that situation, many people seem to overlook reality when it comes to stocks. The past is the past, how is the company functioning today and what are the trends?

Anyone who spent any length of time looking at the market share for the mobile phone makers would not be surprised to see BlackBerry's stock price collapse. They went from a massively dominant position to having less than 4% market share and sinking.

Going back to the possible investment in a bakery, if you found out that every quarter and year the business was losing market share and selling less goods, would you still like the investment? Especially when the business had massive competition and little new innovation to differentiate it? I know I wouldn't.

But investors kept dreaming of the good old days, saying that BlackBerry would regain its former glory. These people were ignoring the truth staring right in their face, the underlying business was crumbling and the company was not able to execute or innovate in time to compete. Realty was as clear as the bright blue sky.

Lesson #2 - Don't Catch a Falling Knife

Investors who watch the charts sometimes love to look at the recent past and think about a rebound in the share price. If a stock continues to drop, there's usually a good reason. Unless the pullback is due to a temporary setback and not a structural failing in the business, like BlackBerry, then a sell-off might be seen as a buying opportunity. But one needs to combine both the fundamental picture as well as the technical charts.

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Every time the stock has pulled back, I can almost hear some traders jumping to buy as they look at the recent prices and thinking that shares were a bargain. They were never a bargain because the fundamental situation was deteriorating rapidly.

Going back to the bakery, if the price of the business was reduced by 20%, would you be more interested? What if sales and earnings dropped by 70%? All of a sudden, that price drop doesn't seem like such a bargain.

Lesson #3 - Hope will Get you in Trouble

Investors make a very common mistake, when a stock falls they don't get out and 'hope' that it will come back. Big mistake.

What an investor should do is fear that a stock may continue dropping like a stone. Sell your losers fast, and let your winners run a long time.

In no time over the past few years has BlackBerry exhibited any type of improvement in market share. Note, I said market share, NOT rhetoric from the company. It's true, that when the company brought out their new phones they were optimistic, but you need to look at the facts!

The facts are that BlackBerry is still a weak player in the market, with no increase in market share at all. There is even a good possibility that this deal might fall apart if they can't obtain financing. Either way, you need to understand the companies you are investing in to avoid some of these mistakes. There are no short-cuts to making money, it takes time and effort.

For information regarding stocks we do like, check out our Flagship Newsletter.

By Joel Laceda - September 23, 2013 BehindWallStreet.com