TCS Daily


When It's Time to Sell

By James K. Glassman - May 22, 2000 12:00 AM

Regular readers of this column know that I rarely miss an opportunity to preach the buy-and-hold approach to investing. History shows that if you save and invest every month in a diverse group of stocks, which you hold for the long haul, it's almost impossible to go wrong. However, that doesn't mean that you should never sell anything. While there are very few bad reasons to buy stocks, there is at least one bad reason to hold a stock.

Just because a stock has declined, that does not mean that it will rise again later. While I always urge people to hold on through the ups-and-downs of the market, you should only hold on if the original premises of your investment are still valid. If you think a company is terrific and it's head-and-shoulders above the competition, then by all means hang in there. Or if you're committed to investing in index funds, assuming you can't beat the averages in an efficient market, that's also a great approach to follow over the long term. But you should not hold on to a particular stock in the flawed belief that what comes down must go up.

I know it can be tough - as long as you don't sell you haven't really lost anything. Psychologically, you just want to get back to where you were. You remember that wonderful time when the stock was at its peak and you believe it can happen again. The emotions are similar to those in Mary-Chapin Carpenter's love-gone-wrong song: "Though we should be out of here, it's so hard admittin' when it's quittin' time."

Let's look at a recent example. Let's assume you bought Pets.com (symbol:IPET), the online pet supplies store, because you thought they had great marketing. You laughed every time you saw that sock puppet in their television ads and you figured these guys were headed straight to the moon. So, right after the company's February IPO, you happily bought at the high of $14 per share, because you believed Pets.com was the first player into this great market and would grow to become a dominant online brand. Then the honeymoon ended.

Investors started to sour on consumer "e-tailers." You realized that the market that looked wide open actually had become very crowded, with outfits like petsmart.com, petmedexpress.com, and petopia (owned by PETCO) all grabbing pieces of the action. And for all its popularity, the sock puppet wasn't moving as much product as you might have thought. So after your $14 per share purchase in February, the stock tanked to $6 per share in mid-March. At that point, you might have thought, "Well, I've taken my lumps, but there's no point in selling now that the stock has hit bottom. I'll wait until it bounces back up to my purchase price. After all, stocks go up and they go down. I'll ride out this volatile market."

It's true in general that stocks go up and stocks go down, but some stocks keep going down. And more importantly for your situation, the original premises of your investment no longer held true. You bought because you thought Pets.com was a great marketer, getting in early and grabbing a dominant share of a big market. When you realized that your initial assumptions weren't quite on target, you should have recognized your moment to sell, instead of assuming that someday the stock was destined to return to $14 per share. After first quarter 2000 earnings estimates were released in late April, Pets.com plummeted again, and traded at a recent $2.19 per share. Will it go up or down from here? I have no idea. It may in fact return to your $14 purchase price, but there's no guarantee, and you should only hold on now if you have reason to think that it will.

This week, I have to bite the bullet and sell one of the losers in my portfolio. I'm selling Digex, not because it has plummeted roughly 40% since my purchase, but because many huge tech companies are jumping into its web-hosting market and I don't see any qualitative advantage enjoyed by Digex. So I'm selling my 32 DIGX shares and buying 29 shares in Lucent Technologies (LU), a highly-profitable giant in the field of communications equipment. Lucent makes a ton of products, including switches for telephone systems, hardware to manage broadband networks, communications chips and equipment to speed the flow of data over optical fiber networks.
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