These 3 Stocks Were My Biggest Losers in 2021. Here's Why I'm Still Holding These Laggards in 2022.

I always believe the stocks I buy will outperform the market, but I'm often wrong. For example, I had bullish reasons to buy shares of connected-fitness company Peloton Interactive (PTON 0.66%), mobile-gaming platform company Skillz (SKLZ 0.33%), and communications-platform-as-a-service (CPaaS) company Bandwidth (BAND 1.10%). But these have actually been horrid investments and my biggest losers in 2021.

Many investors believe I should just cut my losses. However, I'm optimistic these companies can overcome challenges and be winners with enough time. And in a worst-case scenario, I won't pay a high price for being wrong because of one simple portfolio-building trick -- I'll reveal the trick at the end.

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First, let's look at my losers

I personally own 30 stocks in my retirement account. Many have been good investments. But the table below shows just how bad Peloton, Skillz, and Bandwidth have been since I bought them.

*As of market close Jan. 14, 2022.

Investors should always have an investing thesis when buying stocks: a concise argument for why the stock will be a better-than-average returner. I bought these three stocks with the following theses:

• Peloton: World-class brand recognition is causing the company to grow at a torrid pace. And impressive customer retention is helping higher-margin subscription revenue become a bigger part of total revenue. It had a strong cash position to pursue new opportunities. And its acquisition of Precor should help it expand beyond the consumer market and into the commercial market, broadening its scope.
• Skillz: A new way to monetize mobile games: allowing players to earn money by competing in skill-based competitions. There's opportunity for this model to have applications outside of gaming, growing its addressable market. Since going public, the company has exceeded lofty revenue-growth targets. And its gross profit margin is one of the highest there is at 95%. Moreover, CEO Andrew Paradise owns around 17% of outstanding shares, aligning his financial fortunes with those of common shareholders.
• Bandwidth: A value stock (currently trades at a price-to-sales ratio under four). The company has more than 3,000 customers. But many of these businesses operate in multiple countries and are looking for a single company to service their global needs. Already operating in over 60 countries, Bandwidth can be that single communications-platform provider, meaning existing customers will likely increase their spending.

Not all of these theses are playing out as hoped. For example, in the first quarter of its fiscal 2022, Peloton's operating expenses were up 140% year over year, but revenue was only up 6%. In short, the company is quickly burning cash to grow its business (like building an expensive new factory in Ohio), causing it to raise $1 billion by selling stock and diluting shareholders.

The same can be said about the thesis with Skillz. Its gross margin is impressive, but its bottom line is a mess -- through the first three quarters of 2021, it has lost $82 million primarily because it spends more to acquire users than what it generates in revenue. Management argues that the lifetime value of customers justifies the expense. But its user growth has been lackluster since going public -- troubling considering how untapped the opportunity seems to be.

The danger in selling losers too soon

I thought Peloton, Skillz, and Bandwidth would beat the market, but they haven't. Nevertheless, I'm not selling. Attentive readers noticed that I've owned these stocks for 16 months or less. However, when I buy stocks, I commit to holding for at least three years. It's imperative to give theses time to play out, and I consider three years a good starting point.

All companies go through periods of slowing growth and underperformance. If you sold a stock every time it underperformed, you'd sell every stock at some point, including the greatest of our time. This isn't to say concerns aren't ever valid; they almost always are. But winning companies find ways to overcome challenges. And if you pessimistically sell too soon, you'll miss out on stellar returns when they resume their winning ways.

Pessimism easily overpowers investors' mindsets, especially when investments aren't working out well. But it's imperative to understand your own psychology and develop a prevailing spirit of optimism. In his book The Psychology of Money, author Morgan Housel writes, "Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way." Trust me, setbacks are normal.

Image source: Getty Images.

The beauty of doing (almost) nothing

Diversifying your portfolio across many stocks and optimistically holding for years allows a beautiful transformation to occur. The great stocks overcome their challenges and go on to become outstanding performers. By patiently doing nothing, these winning stocks then grow to become meaningful pieces of your net worth. For example, the top five stocks in my retirement account make up 30% of the value. But they didn't start that way -- they've grown into this as the theses have largely played out. 

By contrast, Peloton, Skillz, and Bandwidth now make up just 0.7%, 0.8%, and 1.2% of my retirement portfolio, respectively. Even if they were to drop 50% or more from here, it would do minimal damage to my overall returns. Moreover, my winners are more than compensating for my losers so far.

However, my overall returns would be drastically different if I regularly sold my winners to lock in gains. And they would be different if I regularly invested more money into losing stocks that didn't overcome setbacks. This is why you need an investing thesis: It's how you evaluate decisions. Personally, I only buy more of a stock I own when the investing thesis is being confirmed. By doing this, I decrease the chances of doubling down on losing investments. I also adjust my portfolio very little, allowing "natural selection" to run its course.

This is the investing trick I promised at the start. To summarize, invest for the long haul and do nothing. This strategy allows proven winners to become your portfolio drivers going forward. Meanwhile, losers diminish in importance. 

For this reason, I'm not adding to Peloton or Skillz stock right now even though I could lower my cost basis. My thesis isn't playing out, and it's possible I was wrong about them. I'll reconsider only if my thesis is supported by financial results.

Therefore, if I were to buy more of one of these losers, it would be Bandwidth. It's on pace to grow revenue roughly 40% in 2021, partly thanks to customers increasing their spending as I had hoped. Granted, that's slower than its 48% year-over-year growth in 2020 and slower than some peers. But 40% growth is nothing to sneeze at. And the CPaaS market is growing fast as well, providing a large market opportunity. For these reasons and more, I believe Bandwidth's investing thesis remains strong and it could be a stock worth doubling down on right now.