When should you cut your losses on a broken stock?

This is one of the toughest questions investors face. In October 2005, value guru Philip Durell recommended cutting losses on Doral (NYSE:DRL) at $8.40. He had recommended the shares to Inside Value subscribers five months earlier at $19.90. The stock was cut in half over concerns about aggressive accounting practices. Unfortunately, the shoes kept dropping, and allegations of outright fraud came into play. Philip finally said "enough is enough" and decided to sell the shares:

The company may still represent a distressed value opportunity at the current $8.40 per share price, but even so, I recommend that you sell Doral. I feel sorry for members who have lost money on Doral, but I would be a lot sorrier if I didn't admit it and further revelations caused members to lose even more money.

Today, $8.40 looks like a fortune compared to the $1.41-per-share offer from privately held FPOB Corp. While there is still a chance of a higher counteroffer emerging, the stock looks stuck in the low single digits.

As hard as it might be, selling for a loss is sometimes the right move, especially when management is no longer trustworthy. For more advice on selling, see these Foolish articles:

Despite taking a hit on Doral, Philip's picks are still beating the market by more than 8%. Click here to learn more about value investing.

Financial Services editor Joey Khattab does not own shares of Doral. The Fool has a disclosure policy.