Friday, January 25, 2008

Lugging Along the Losers

The losers…you know which ones I reference…the laggard stocks that have fallen below your purchase price and show no inclination to increase in value. The number of losers in most people’s portfolios has probably risen dramatically in the last few weeks. The question is - what do with them.

One option is to turn the bad trade into a long-term investment. With the extension of the investment horizon, the tolerance for price variance increases. Move the ticker symbol to the bottom of the list. Whew! Out of sight, out of mind!

This probably only beneficial for the psychological relief it provides. The real question is whether the stock is down in sympathy with general market conditions or due to company-specific problems. If the latter is the cause for the sell-off, then it is probably better to just cut your losses and put your money to work in a stock that is exhibiting healthy trading patterns.

Christopher Wright, a seasoned financial writer and a contributing analyst for Crystal Equity Research, touched on the topic in his recent market paper, “Great Thoughts from Great Investors.” Wright has interviewed many of the leading investment strategists and economists of our time. In the paper Wright quotes James Glassman, author of Dow 36,000: “selling is really the hardest thing about investing.”

That is probably an understatement!

Rather than making a qualitative decision to sell as I suggested above, some investors set a hard and fast rule such as a percentage decline. In his paper, Wright mentions a money manager who sells for salvage value if the investment falls by half.

Others set stop loss orders at 10% or 15%. Unfortunately, in the event of great market volatility, such as we have seen in recent months, these narrow parameters can force an investor out of solid companies whose stocks rebound when trading become rational again.

Perhaps the key is simply making the right choices in the first place and then letting the course of the economy and markets unfold. Wright quotes a number of leading portfolio managers with great tips for finding and taking positions in good investments. If there is some volatility along the way, take the attitude of Bruce Berkowitz of Fairholme Funds: “I don’t mind a bumpy ride as long as I get to where I need to be at the end of the day.”

Visit the Crystal Equity Research web site to read more sage advice from the masters in the market paper, “Great Thoughts from Great Investors.” For more interviews and commentary from Christopher Wright, visit The Sine Wave Investor.

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