Three ways to think about ditching big loser positions.
(1)
Sit down and, with an honest-to-goodness pen and paper, write down why you originally bought them.
The facts available, the reasoning, the expectation.
If that reasoning still holds, keep holding them. If not, don’t.
(2)
Imagine you got up this morning to find that the positions had been sold in your account, and you now have the cash.
(ignore tax consequences for this scenario)
Would you buy them at today’s prices? i.e., would they be the best possible investment use of that cash that you can think of?
If not, sell.
(3)
(outsmarting your monkey brain–assumes that selling is actually the right thing to do)
Sell half now. Wait a short while, sell the rest.
If the price goes up in between, you’ll feel like a genius for having waited before selling the second half.
If the price goes down in between, you’ll feel like a genius for having at least sold some right away.
The main case for holding: if the positions are small, and you are youngish and still saving and accumulating investments,
there is a case for holding things and giving things time to work out, provided that still seems possible.
Even if you aren’t that sure about the outcome.
Many years later, either they’ll have worked out or they’ll in any case be a trivial part of your capital.
But you have to at least believe in a decent chance of their coming good, and avoided the common problem of losing money because you had a good pick but were too impatient.
My personal rule: if the current price is under about 12 times what you think they can manage as “pretty darned sure” EPS averaged 5-10 years from now, you’ll probably do fine.
The thinking is that, whether they’re profitable or not, eventually the market will expect it.
The waiting time isn’t infinite, and pretty much nothing is predictable more than a decade out.
It’s generally best to assume that every firm will be trading at a multiple in the teens of current honest profits when you go to sell, assuming it’s a few years from now.
Jim