On our Investing Beginners discussion board the other day, new community member DrRoot asked:
"I have a section of my portfolio with companies that are under $2. Four of the six stocks have been absolutely stagnant for the last eight months or so [On2 Technologies (AMEX:ONT), mPhaseTechnologies, One Voice Technologies, and LJ International (NASDAQ:JADE)]. I am feeling an impulse to just sell them for a loss and invest the money into a more mainstream company [like Microsoft (NASDAQ:MSFT), forecast to hit $33, or one of the many Motley Fool Hidden Gems newsletter recommendations]. Is there any rule of thumb or indicator that I could consider? I feel like as soon as I sell they are going to go up, but if I sit on them they will do nothing."
His query launched an enlightening discussion, the highlights of which I'll share with you here:
UrinalMints (hey, don't assume that our community members are staid and boring!) responded: "Have you considered selling some of your winners to offset your losses? I had the same problem with JDS Uniphase (NASDAQ:JDSU) and Lucent (NYSE:LU). I sold some winners and made the taxes lower by deducting my losers... well, I haven't done it yet... I just sold both of them this year.
Jrr7 added: "How much are these companies costing you to hang onto? Your costs include:
- You don't get the tax deduction from the loss
- You don't get the additional cash to be able to invest; thus, you miss out on investing in more profitable opportunities
- You're worrying a lot about these stocks and getting emotionally involved -- in other words, you're letting them continue to abuse you in an abusive relationship
- You're putting a lot of time into keeping up with them, time that could be spent doing more productive research (and also, much less information is available about companies below $5/share)
"Don't do something on impulse -- consider the reasons for and against it and make a rational decision."
Bogwan advised: "My feeling is that those companies are going to do nothing for years until they either go bust, or are bought by a larger company. You should look to see if they have cash enough to last a few lean years. It would be nice if the cash came from sales [of products and services, presumably, not sales of chunks of the business and also not from] borrowing/stock sales."
Jrr7 returned with more good advice: "The stock market doesn't necessarily obey your feelings. This is both good and bad. Yes, these stocks could do well immediately after you sell them, but then again, they might not. The market rarely has emotions or memory (and it's hard to determine when it does). Specifically, it does not do things to spite you; it's just composed of people trying to make profits. If they can make profits at your expense they will, but they're not going to do something just to make you feel stupid.
"Compare what you're saying to someone who says 'What if I break up with this guy and he becomes the perfect man tomorrow' or 'If I break up with this guy I have to admit that I made a poor choice.'
"Get your emotions out of the picture. The only emotion you should listen to when investing is the quiet little voice that says, 'This stuff is no good -- stay away, stay away.' The greedier or more fearful you're feeling, the less likely your feelings are to be true. "
There isn't much I can add to all this good advice, except to point out that DrRoot's stocks trading for less than $2 per share are penny stocks, and that's a particularly volatile, manipulate-able, and risky class of investments. Learn more about penny stocks in these excellent and informative articles:
- Rick Aristotle Munarriz: Penny Stock Nation
- Jay Perlman: Securities Fraud: Penny Stocks
- Zeke Ashton: Straight Talk on Penny Stocks
- Bill Mann: Hype, Spam, and Penny Stocks
- Tim Beyers: Penny Stocks From Heaven
I invite you to join the conversation and share your own thoughts on how to view and deal with dogs in your portfolio. Or just drop in and see what others are saying.
And for more thoughts on when to sell a stock, read Chuck Saletta on the topic, and a recent Rich Smith article, too.
Selena Maranjian 's favorite discussion boards include Book Club , The Eclectic Library, and Card & Board Games. She owns shares of Microsoft. The Fool has an ironclad disclosure policy. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.
