Jewish World Review May 25, 2000 / 20 Iyar, 5760
James K. Glassman
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
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