Clicking on banner ads enables JWR to constantly improve
Jewish World Review May 25, 2000 / 20 Iyar, 5760

James K. Glassman

Jim Glassman
JWR's Pundits
World Editorial
Cartoon Showcase

Mallard Fillmore

Michael Barone
Mona Charen
Linda Chavez
Greg Crosby
Larry Elder
Don Feder
Suzanne Fields
James Glassman
Paul Greenberg
Bob Greene
Betsy Hart
Nat Hentoff
David Horowitz
Arianna Huffington
Marianne Jennings
Michael Kelly
Mort Kondracke
Ch. Krauthammer
Lawrence Kudlow
Dr. Laura
John Leo
David Limbaugh
Michelle Malkin
Jackie Mason
Chris Matthews
Michael Medved
MUGGER
Kathleen Parker
Wes Pruden
Debbie Schlussel
Sam Schulman
Roger Simon
Tony Snow
Thomas Sowell
Cal Thomas
Jonathan S. Tobin
Ben Wattenberg
George Will
Bruce Williams
Walter Williams
Mort Zuckerman

Consumer Reports
Newswatch

Trakdata


"When Itís Time to Sell"

http://www.jewishworldreview.com --
REGULAR READERS of this column know that I rarely miss an opportunity to preach the buy-and-hold approach to investing. History shows that if you save and invest every month in a diverse group of stocks, which you hold for the long haul, itís almost impossible to go wrong. However, that doesnít mean that you should never sell anything. While there are very few bad reasons to buy stocks, there is at least one bad reason to hold a stock.

Just because a stock has declined, that does not mean that it will rise again later. While I always urge people to hold on through the ups-and-downs of the market, you should only hold on if the original premises of your investment are still valid. If you think a company is terrific and itís head-and-shoulders above the competition, then by all means hang in there. Or if youíre committed to investing in index funds, assuming you canít beat the averages in an efficient market, thatís also a great approach to follow over the long term. But you should not hold on to a particular stock in the flawed belief that what comes down must go up.

I know it can be tough Ė as long as you donít sell you havenít really lost anything. Psychologically, you just want to get back to where you were. You remember that wonderful time when the stock was at its peak and you believe it can happen again. The emotions are similar to those in Mary-Chapin Carpenterís love-gone-wrong song: "Though we should be out of here, itís so hard admittiní when itís quittiní time.Ē

Letís look at a recent example. Letís assume you bought Pets.com (symbol:IPET), the online pet supplies store, because you thought they had great marketing. You laughed every time you saw that sock puppet in their television ads and you figured these guys were headed straight to the moon. So, right after the companyís February IPO, you happily bought at the high of $14 per share, because you believed Pets.com was the first player into this great market and would grow to become a dominant online brand. Then the honeymoon ended.

Investors started to sour on consumer "e-tailers." You realized that the market that looked wide open actually had become very crowded, with outfits like petsmart.com, petmedexpress.com, and petopia (owned by PETCO) all grabbing pieces of the action. And for all its popularity, the sock puppet wasnít moving as much product as you might have thought. So after your $14 per share purchase in February, the stock tanked to $6 per share in mid-March. At that point, you might have thought, "Well, Iíve taken my lumps, but thereís no point in selling now that the stock has hit bottom. Ií ll wait until it bounces back up to my purchase price. After all, stocks go up and they go down. Iíll ride out this volatile market."

Itís true in general that stocks go up and stocks go down, but some stocks keep going down. And more importantly for your situation, the original premises of your investment no longer held true. You bought because you thought Pets.com was a great marketer, getting in early and grabbing a dominant share of a big market. When you realized that your initial assumptions werenít quite on target, you should have recognized your moment to sell, instead of assuming that someday the stock was destined to return to $14 per share. After first quarter 2000 earnings estimates were released in late April, Pets.com plummeted again, and traded at a recent $2.19 per share. Will it go up or down from here? I have no idea. It may in fact return to your $14 purchase price, but thereís no guarantee, and you should only hold on now if you have reason to think that it will.

This week, I have to bite the bullet and sell one of the losers in my portfolio. Iím selling Digex, not because it has plummeted roughly 40% since my purchase, but because many huge tech companies are jumping into its web-hosting market and I donít see any qualitative advantage enjoyed by Digex. So Iím selling my 32 DIGX shares and buying 34 shares in Lucent Technologies (LU), a highly-profitable giant in the field of communications equipment. Lucent makes a ton of products, including switches for telephone systems, hardware to manage broadband networks, communications chips and equipment to speed the flow of data over optical fiber networks.


JWR contributor James K. Glassman is the host of Tech Central Station. Comment by clicking here.

Up

05/23/00: End the "Telephone Tax"

05/16/00: Time Warner Gets a Bad Rap

© 2000, Tech Central Station