Wednesday, February 17, 2016

I Refuse To Sell Stocks At A Loss

In my years of investing, I have always refused to sell stocks at a loss.  Now I know some people may think this is foolish since many investors sell at a loss to harvest capital losses or to cut their losses.  Personally, I would rather hold a stock with huge unrealized losses on paper than to sell them and realize those losses as a reality.  If you don't sell the stock at a loss, you don't actually recognize the loss; you just have an unrealized loss on paper.  Once you sell it, that money is lost and gone.  I know people say you sell to cut your losses, but for me, if I'm a long term investor, then I plan on sticking around for the long haul.  Most people forget that when you purchase a stock, you are essentially purchasing a business.  Every business will have its ups and downs; you just have to be able to stick with them through the good times and the bad times.


To give some illustrations, my parents had purchased MSFT and AOL for me when I was a teenager.  MSFT performed exceptionally well in those early years, but after AAPL came out with the iPod, the iPhone, and the iPad, MSFT shares started to plummet.  I know many people who decided to sell during that time out of fear that tablets would make desktop and laptop computers obsolete.  I continued to hold onto MSFT through the rough patches, reinvesting all dividends.  Now MSFT is trading above $50 per share and has rewarded shareholders with nice dividend increases.  AOL, on the other hand, is a different story.   AOL eventually became TWX and TWC, which both resulted in huge unrealized losses for me.  I refused to sell them at a loss so I just slowly and faithfully continued to reinvest those dividends.  Then one day, due to an acquisition, TWC shares shot up significantly.  At that point in time, I was able to sell those shares at a gain.  Now I'm waiting and hoping for TWX to eventually go up in price at which I will sell at a gain.  If not, I will just continue to reinvest the dividends and see what happens.

My last example is when I purchased TM in college.  I had read from many textbooks that Toyota is a company that focuses on quality.  Every textbook would cite Toyota as an example every time it talked about quality and so, I decided to invest in that company.  It was doing pretty well for me until the brake recall.  During that time, TM took a serious hit in stock price, but I refused to sell.  I just kept holding on until I was eventually able to sell it at a gain.  I still believe that TM is a solid company.  However, it's not a company that fits into my retirement strategy when it comes to stocks since it is not a dividend growth stock.

Long story short, I have not (thank God) recognized any losses on my stock investments because of my mindset to refuse to sell a stock at a loss.  I would rather hold the stock forever and collect dividends than to realize a loss.  It's similar to buying a real estate property.  The real estate fair market value may go down in price, but as long as you don't sell it, you don't actually recognize the loss.  Even if the real estate property is appraised at a lower value, you can always rent it out and collect rental income off it.

What are your views about selling stocks at a loss?  Do you ever sell stocks at a loss?  If you do, what's your criteria to sell?

3 comments:

  1. I have a similar mentality but only for stocks that have sustainability and that is the big question. Before scandals like Lehman bros, Enron, tyco, etc... It was easy to buy and hold forever. However consider if a stock is declining rapidly on its way to bankruptcy and the stock delisted or removed completely. Then you would be far better selling at a loss than literally losing 100%. So pick the right stocks and you shouldn't have too much to worry about.

    One other point. If stock A takes 5 years to get you above your cost basis, but another stock B could do it in 1 year, wouldn't it be worth it to sell A for a loss and buy B?

    Anyway, I get your point and I do tend to agree in general but there are some caveats to consider.

    Thanks for making me think :)
    -Adam

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    Replies
    1. Hi Adam,

      You brought up some very good points. One point I didn't consider was opportunity cost. You are absolutely right; if stock A takes 5 years to get above cost basis, but stock B could do it in 1 year, it would be worth it to sell A at a loss and buy B. Thanks for your input.

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