Stocks almost have a magical, mysterious element to them. To think that you’re actually a part owner of the company, eligible to receive a part of the profits in the form of dividends, and to earn a portion of the growth in the form of capital appreciation, aka seeing the stock rise in price. To think that you could be a part of a big winner, seeing your investment grow and grow, even doubling or tripling is pretty amazing. Stock pickers like Warren Buffet make it look easy, as he sits back and enjoys the spoils of his ever appreciating investments. Stocks can actually be quite risky though, and many people have seen their initial investments waste away. While there is always risk and you shouldn’t stray away from investing in the stock market, any investments should be made carefully. It is with this in mind that I wanted to share with you a cautionary tale, a tale of a stock that lost favor and lost investors money; GT Advanced Technologies.

Flash back to earlier this year, in February. Rumors were swirling around the unveiling of Apple’s new iPhone, code named iPhone 6. The last rendition of the iPhone5c wasn’t all that incredible and left people wanting more. Almost mythical, the iPhone6 was supposed to blow our minds with its advanced technologies. One of the big sticking points of previous iPhones was the seemingly poorly constructed screen, leading the screen to crack with even the slightest drop. A whole sub-industry had developed for iPhone screen repairs. In comes GT Advanced technologies, hereafter referred to by its stock ticker, GTAT.

GTAT was known for developing many new technologies, but the one that was most talked about was its new sapphire glass, that could be used as a screen on a device. One thought led to another and wow, what if Apple used this new glass as a break-proof screen on their new iPhone? Then the news came out that Apple and GTAT were forming a partnership, and although they were a little mum on the details, there was only one possible explanation; Apple was going to use GTAT’s sapphire screen in their new phone. Woo-hoo! It was around this time that I jumped in, at $18 per share. It was certainly going to double I thought.

Many months went by and much speculation surrounded this mysterious company. Much like people sit around wondering about their favorite football team, investors on numerous blogs and other websites wondered what GTAT was up to. More and more good news kept coming out. Apple announced a loan to GTAT in the amount of $150M, with the purpose of developing scratch and break-proof screens. GTAT announced and broke ground on a new factory in Arizona, one that would have the capacity to develop hundreds of thousands of sapphire screens. Things couldn’t  look any better and although the stock price ranged between $15-$20, we all eagerly awaited the September 9th Apple announcement.

The big day finally came, and people were excited. So many people in fact tuned into watch the live stream of the Apple announcement that the live stream couldn’t handle it and broke down. One by one, Tim Cook, Apple CEO announced the new features. Yes it was in two models, yes it had a health component and a payment feature. Yes it had the new operating system. No mention of a new screen. People were incredulous at first but once it was clear that there would be no sapphire screen supplied by GTAT, the stock started falling. $18, $17, $16, $15, and it all happened FAST. I knew that this was it and I got out at $15.

Flash forward a couple of weeks, the stock had continued to fall but had leveled out a little above $10. Sure it was some bad news but GTAT did have other products that they sold. Then, from out of the blue, the news came out: GTAT was declaring bankruptcy. Apparently having only a couple of hundred thousands in revenues and millions in debt was suddenly less attractive when your potentially huge customer shut you down. The stock tanked, in a matter of minutes from $11 to $1, a 90% drop. Your ten shares worth $110 Thursday afternoon was worth $11 Friday morning. Bummer. I wish I could say that this was  a one off experience and that this didn’t happen a lot, but investing in stocks is risky and companies go out of business everyday. Let’s take a step back and discuss what I learned.

1) Speculation stocks are risky.

A company like Coca-Cola or Apple isn’t going out of business anytime soon. On the flip side, they’re not going to double or triple over the next few months. A more speculative stock, like GTAT certainly could have, but it could also go out of business and lose all it’s value. Although a balanced portfolio should take on some risk like this, certainly limit it!

2) A stock’s price is so much more than just it’s value.

Future expectations via speculation also play a role in the price of a stock. For example, if you were pretty sure that Apple would sell a TON of iPhone 6s, perhaps you would have bought the stock in advance of them releasing it. Trouble is, you’re not the only one doing it as probably a lot of other people are too. This great demand will slightly overtake the supply and the price will rise. Now the price of Apple stock includes some speculation of how many iPhones they’ll sell. For GTAT, speculation was built in that they would supply Apple the screens for the new iPhone. That’s why the price was so high, not because it was worth that much, but because people thought it could be worth that much.

3) Have an understanding of why you own the stock, and reevaluate on a semi regular basis.

I knew that the only reason I owned GTAT was for the chance that they would supply Apple the screens and that this would benefit them greatly. I didn’t care about the other products they made, just the sapphire screens. When it was announced that Apple wasn’t going with them, I evaluated the stock. No, my rationale for owning them hadn’t changed, so I decided to sell. We live in a constantly changing world and you should always be open to change your mind.

4) Know your ceiling, and know your floor.

It’s important to have these numbers in your mind. Don’t get too greedy and don’t let your stocks drive you to the poor house. At a certain point, it’s smart to ‘ring the register’ or take profits. Let’s say you’re up $10 per share in a stock. That $10 gain in only on paper and if it then goes down $12, we’ll you’ve ‘lost’ $2 per share. Better to set your ceiling and take the profit to be safe! Conversely, all of my stocks would only go down so far before I sold them. At a certain dollar amount, I have already decided that these are no longer attractive investments and that I should move on. Don’t stick around just because you’ve lost money, that money is lost and you may or may not get it back. Be forward thinking; don’t be stuck in the past.

5) Don’t live in a bubble.

Our world is growing and changing like never before. Old ways of thinking are always getting tossed out the window thanks to innovation and the speed at which information is exchanged. Be knowledgeable, do your homework on your investments. Understand why you bought a stock and learn what others think about it. When news breaks about your stock, be attentive to it. Had I not been keeping up with Apple’s announcement, I would have lost much more money than I did!

Investing our money will always involve some degree of risk, you can’t get rich off of your savings account. In a balanced portfolio, you’ll likely have some riskier stocks that could either double, or be cut in half. Just be careful with your investments; don’t follow the hype. Do your homework and make your own decisions, and never be afraid to jump out when a stock just doesn’t feel right anymore!

Thanks for reading! Here’s another you might enjoy: What to do when the sky is falling and How does the stock market work?

Finally, if you’re curious to learn more, check out the book that Warren Buffet himself regards as his favorite investing book: The Intelligent Investor It’s definitely on my Christmas list!

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