Don't Sell That Stock

• Report this Comment On June 02, 2009, at 9:38 AM, tgnytg wrote:

  This article seems to tell me to throw money at losers and let the winners stagnate.

  The premise of the article only applies to dividend paying stocks without reinvested dividends. The key to success is applying new money (whether by dividend or cash additions) to positions to get the best return, and the article completely discounts the possibility that shares will increase in value.

  If a portfolio is composed solely of non-dividend paying shares, the "growth stocks" that increase in share price will automatically increase their portion of your portfolio, while those with slower growth rates will automatically decrease their percentage.

  The concept of buying more shares of laggard stocks is sure to have lower returns (but you will receive your modest dividend every quarter) than applying new money to the high growth companies.

• Report this Comment On June 02, 2009, at 11:51 AM, RobertC314 wrote:

  tgn,

  Obviously they would not advocate buying more "loser" stocks. This article refers to what happens when you add more (new) money to your portfolio:

  Regardless of what type of assets are in your portfolio (or how successful they are), you will dilute your position in your existing holdings if you do not buy the stocks you already own. If we take an extreme example:

  I own $5000 of stock A and $5000 of stock B, therefore A and B both represent 50% of my holdings. If I add another $10000 into my portfolio by buying stock C, stocks A and B now only represent 25% of my total assets. Note that there is no notion of "growth" or "value" or "income" stocks.

  I am not sure I agree with the usage of the term "sell", but it has diluted the original shares. If stock A were to triple in our example, that would have represented a 100% return in our original portfolio, while it would only represent a 50% return in our portfolio after adding the new money.

  The idea of the article is very sound - you should avoid diluting shares of companies you believe are winners by maintaining their relative percentage in your portfolio when you add new money. If you have stocks you no longer believe are worth new money, then they aren't worth the money you currently have in them. Sell and buy something that is worth it.

  My only caution on that would be to watch out for broker fees. If you are investing $1000 and you broker charges a fee of $10 per trade, you have taken a 1% loss immediately if you buy a single stock. If you try to spread that $1000 out between 3 or 4 stocks, then you are taking a 3-4% loss right out of the gate (and don't forget you will get hit again when you sell).

• Report this Comment On June 02, 2009, at 7:17 PM, mountain8 wrote:

  Sorry, nice conception but following this idea to its end point leaves you with one stock and no diversification.

  Also if one stubbornly sets and leaves his portfolio at something like 20% commodities, 20% finance, 20% tech or bonds, treasuries, etc, or 10% China, 10% emerging countries, 10% American etc. he does not maximize his investment.

  The tone of your article suggests once an investor has 8-10 stocks, (after 'selling' his first stock 7-9 times) he should just leave it alone. I believe to maximize one's potential value he/she has to be aware of and willing to be flexible enough to change his original structure if the situation warrants it. Otherwise an investor of 20 years would miss out on all the emerging market potential alone because he might have to "sell" (not buy) more IBM, or Bank of America.

• Report this Comment On June 02, 2009, at 7:30 PM, mountain8 wrote:

  Tgn,

  Interesting if you semantically deal only in %. If you deal in $, your argument loses weight, ie,

  If I have $5000 in A and $5000 in B, then I buy $5000 of C, I dilute my value. I don't believe so. If A doubles, my PORTFOLIO earns a lower amount in than my original makeup if and only if dealing in %. If A doubles, I make $5000 whether I buy a hundred other stocks.

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