Please ensure Javascript is enabled for purposes of website accessibility

What Does Bag Holder Mean?

The worst-case scenario for a stock is that you become a bag holder and the stock goes to zero. Here's how to avoid that fate.

By Mike Price – Updated Jul 1, 2022 at 11:44AM

What is a bag holder?

A bag holder is a person who holds on to a stock all the way to $0 despite signs along the way that the stock needed to be sold. Bag holder stocks are also known as value traps, meaning that the stock seems like a value when in reality it is worthless.

However, sometimes the stock that everyone else thinks is a dud eventually rebounds and makes investors rich. We'll discuss how you can become a bag holder, a few examples of bag holder stocks, and how to determine whether a stock is a value or a value trap.

A man looking at research of a bag holder stock.
Image source: Getty Images.

How do you become a bag holder?

Many bag holders simply lost track of their investment. As you change jobs and open accounts with new investment advisors and 401(k) providers, it's possible to lose track of your accounts -- especially if you've moved and no longer get physical statements. In this instance, you could own stocks that go to zero because of bad business economics. The solution to this is simply organizing and checking in on your investments.

We'll focus on bag holders who hold a stock all the way to zero because they can't quit it. There is a lot of emotion and behavioral bias in investing.

Whether you're a beginning investor or a multi-billionaire hedge fund manager, after you buy a stock, all new information is met with confirmation bias. With confirmation bias, all new information is filtered to confirm your prior opinions.

You may have seen this type of bias with some of your friends and politics on social media. When you're so enraptured with a value stock that all new information confirms your prior beliefs even as the stock goes to zero, you become a bag holder.

Examples of bag holder stocks

There are several bag holder stocks in my personal investing experience. Every single one was a gold mining stock, and I couldn't tell you the name of any of them.

Many bag holder stocks are originally purchased for the upside potential. The company has a new drug coming out or it's saddled with debt and that's depressing the stock price. In my case, the gold miners were supposed to go up 10X once the old price soared and they found gold. Of course, gold prices didn't soar and none of them found gold.

Not all bag holder stocks are tiny, however. Value hedge fund managers lost billions on Valeant Pharmaceuticals, now called Bausch Health Companies (NYSE:BHC). It didn't quite go to zero, but peak-to-trough losses were around 90%.

A few of the same managers followed JCPenney (OTC:JCPN.Q) and Sears Holdings (OTC:SHLDQ) to eventual bankruptcy.

Related investing topics

How to avoid becoming a bag holder

The first step is to control your own biases. That doesn't mean you study what all the behavioral biases are and try to identify when they're affecting you. You have to create an objective framework through which you evaluate your investments.

Use a checklist when initially evaluating the investment. Track what management says on conference calls and compare it to actual results. Reevaluate everything at least annually. If sales and returns are falling, debt is rising, and insiders are unloading their shares, there's probably something wrong. Learn when to sell stocks and stick to it.

Of course, the best way to avoid becoming a bag holder is to skip the value traps in the first place. Stocks with loads of debt, no growth, and bad management can look like great values, but, usually, they aren't. Additionally, think long and hard about investing in a dead industry. For every Best Buy (NYSE:BBY), there are 10 Circuit Cities.

Mike Price has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Best Buy. The Motley Fool recommends Bausch Health Companies. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
409%
 
S&P 500 Returns
120%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 02/07/2023.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.