You can be the best stock investor on earth, and you'll still have some regrettable investments. Your portfolio will still feature a few stinkers in which you've lost money. It has happened to Warren Buffett and surely to every lesser investor.
As you strive to become a better investor over time, making fewer mistakes and more money, you'll need to figure out what to do with those loser stocks. Here's a look at what Buffett, the CEO of Berkshire Hathaway himself, recommends.
Image source: The Motley Fool.
Your choices with losers
If you're staring at an underperforming stock in your portfolio, there are several things you could do or should do:
- Assess its potential. Yes, it might be down, but is it a great company with a rosy future that's just down temporarily, as many terrific stocks are these days? Or is the company facing intractable problems? Take a closer look.
- Think about hanging on. If the company's problems seem temporary, consider hanging on. Remember that just about all the terrific long-term performers you can think of, such as Apple, Microsoft, Costco, and so on have increased in value phenomenally -- but they haven't done so in a straight line.
- Think about selling. If the company is facing one or more problems that seem hard to overcome, such as a new competitor eating its lunch or debt piling up faster than is manageable, it can be smart to sell.
What Warren Buffett recommends
Here's what superinvestor Warren Buffett advises, regarding losing stocks in your portfolio -- he said it at one of his annual shareholder meetings in the 1990s:
It is true that a very important principle in investing is you don't have to make it back the way you lost it. ... And in fact, it's usually a mistake to make, to try and make it back the way that you lost it.
Buffett likely said it because he knows that many investors do make that mistake. Here's what it looks like: Imagine that your portfolio has some good performers and some great performers, and a dud or two. You invested, say, $5,000 in one of those underperformers, and that stake is now worth $2,000. You're down $3,000!
Maybe sales are puny and shrinking, with few people interested in the company's products or services. The future doesn't look good for the company, but you don't want to sell -- because then you'd have a $3,000 loss. So you hang on, hoping that the shares will somehow bounce back. Well, that's not very likely to happen. It might, perhaps, but it's not likely.
If you were to just sell what's left of that position, netting around $2,000, you can move that money into a different stock in which you have much more confidence, a stock with a greater chance of increasing in value. You can make up that lost $3,000, but you stand a better chance of making it up in a different, more promising stock. As Buffett advised, don't try to make it back the way you lost it.
Keep Buffett's advice in mind whenever you're looking at losers in your portfolio.
