Is it wise to hold on to stock that has plummeted and then stabilized?

Question

I own some stock that lost more than half its value. It has now been more or less stable for months, and I'm tempted to get rid of it because I see poor prospects in the future for this line of business.

However, I'm told by others that this is unwise, that this is the worst time to sell -- I should recover the losses!

Isn't this the gambler's fallacy? What stops the stock from going down by another half in the future, again? And again?

The people giving me this advice have no insight at all into this particular stock nor have a particular keen insight into economics in general. However, they present this as if it is obvious fact that everyone should know, that if you have experienced this, then you should wait until it has regained at least some of its value.

What basis would anyone have for this statement? Is it true that statistically, more often than not, a company will recover?

The way I view this, is if I would rather buy or sell stock in the company now. What happened in the past is simply unfortunate (for me), it by itself doesn't have any bearing on the future for this company.

Answer 1

This might be closer to the sunk cost fallacy with a bit of loss aversion thrown in. I know it is hard emotionally to "lock in your losses", but that money is gone and it is a new day. You have an asset that is worth what the stock trades at today and that's what you have to work with.

It is very possible that stock might regain its previous losses, but the fact that you paid more for it doesn't make it any more/less likely to than any other stock.

The key is that you have to pretend that you have the cash value of the stock today and never invested it. If you would buy that stock today, keep it. If you wouldn't trade the same amount of cash for the stock, try something else.

Answer 2

(1) Assets held in stocks for many years (regardless of their "paper" value at any given moment, like now) are a way to protect them from taxation for those years. Unlike bank accounts, mutual funds, real estate, income-generating assets, etc, stocks incur NO taxes AT ALL during those held years-- it's a 100% taxation shelter for that time. So if there is any chance at all that your stock will recover, hold onto it.

(2) Another reason to hold and not get rid of a stock is that if/when it does recover and you sell profitably, if you sell more than a year after acquisition, you pay long-term capital gains tax rate, which is less than short-term capital gains tax rate, and way less than wage/salary/interest/dividend income taxes.

(2) Losses on stock are NOT valueless- in the USA, when you sell at a loss, you can write-off those losses against income that year* (gains made in other stock transactions, or in your salary) when you file your taxes, which will lower your taxable income and possibly even move you into a lower tax bracket (further reducing your taxes). *there are limits to how much you can do this ($3000/yr), but you can carry-forward excesses beyond this limit into many future years, saving you taxes in those future years.

The more money you've lost, the greater the benefit.

Carefully timing your sales-at-a-loss can thus be beneficial to your taxes on a given year. Rich people do this all the time-- selling losses in the same year as they make a big gain in some other transaction. Lots of tech stock option recipients used this trick to extract at least some value out of worthless ESPP/ESOP stock.

Answer 3

I see poor prospects in the future for this line of business

You answered your own question.

Unless a stock is already at exactly 0 it can always go down further. Holding onto a stock believing that in the long term it will go down is just about the opposite of any decent investment advice ever.

Now obviously you could be acting on good information that contradicts what you believe, but it doesn't seem like you have such information. The information you seem to have is "don't sell because you're currently down" which is terrible advice.

The advice does hold true for stocks that went down that you still think are worth holding onto because of their long term prospects. In other words: don't just sell stocks because they went down. Sell stocks because you don't think they're worth their current price.

Answer 4

Say you bought 100 shares of X at $10. for 1000...

it plummeted to $6 a share, because (let's say it missed an earning).

The question you should be asking isn't whether you should hold.

Remember, you still have $600 of cash equivalent (in X) And remember what Buffett said about such situations.. "You don't have to make it back the same way you lost it"

The REAL question you should be asking is given you have $600 ... would you buy X again at 6 dollars a share. Or is there another stock Y that you would rather buy. (the second component to the question really isn't all that important or even relevant)

if the answer is yes.. you would buy X again, you hold.

if the answer is no.. you should sell.

If the answer is hell yes, then you should buy even more.

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Before I forget... someone (who shall remain nameless) is going to say I didn't answer the question...

You already said you see poor prospect for the company.... I think the answer to the "would you buy this stock again" question is a "no"?

Sell.

Answer 5

It really depends the company. There are plenty of charts that show stocks can go to (effectively) zero and others that show recoveries. There are no universal rules.

You could always look at the chart (or company if you're a fundamental trader) and think about whether or not you would buy if you did NOT already have a position.

If you decide to hold, be cautious with your stops. A sideways stock that appears to have stabilized can break in either direction.