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When to Sell Stocks at a Loss [And Turn It Into a Gain] - YouTube
Channel: Let's Talk Money! with Joseph Hogue, CFA
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We鈥檝e all been there.
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You follow a stock lower, losing five-, ten-percent
and more but hold out hope for the rebound.
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I鈥檓 going to show you how to make one of
the most difficult decisions in stock investing,
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how to know when it鈥檚 time to cut your losses.
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How to know when to sell stocks at a loss.
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Beat debt.
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Make money.
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Make your money work for you.
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Creating the financial future you deserve.
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Let's Talk Money!
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I鈥檒l not only give you three scenarios for
when to sell stocks but the strategies you
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can use to turn that loss into a gain.
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We鈥檙e talking when to sell stocks at a loss
today on Let鈥檚 Talk Money!
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Hey Bowtie Nation, Joseph Hogue with the Let鈥檚
Talk Money channel.
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A special shout-out to all you in the nation,
thank you for spending a part of your day
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here.
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If you鈥檙e not part of the community yet,
just click that little red subscribe button.
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It鈥檚 free and you鈥檒l never miss an episode.
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This could be one of the most important videos
you鈥檒l watch as an investor.
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That鈥檚 going to sound like an exaggeration
but I guarantee you, after watching this video,
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you鈥檒l have the strategies you need to save
yourself thousands in losses and get out of
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a stock before it鈥檚 too late.
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So I want to share a story with you and anyone
investing long enough has seen this first-hand.
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This was originally a blog post from an investor
and mistakes that cost him $30,000 in just
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a few months.
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Robert is from Kentucky and if you know the
area, you know they love their coal up there
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in Appalachian country.
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So Robert was investing in coal stocks and
doing great, booking a 240% return in a few
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years to 2011 on Alpha Natural Resources.
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That鈥檚 when the pain started.
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Coal prices plunged as competition from natural
gas heated up.
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The coal companies had all put on mountains
of debt in the good times and it was absolutely
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destroying their stock prices into 2014.
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Robert invested just over $10,000 in Peabody
Energy, ticker BTU, and watched as the shares
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dropped like a rock first from $16 to $11
a share, then to seven a share and lower.
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But Robert loved his coal and was sure it
would rebound.
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Each time the shares took a big drop lower,
he dollar-cost averaged down, buying more
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shares so his average price would be lower.
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This is a huge mistake a lot of investors
fall into.
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Chasing that stock lower, thinking with a
lower average price then you only need the
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shares to rebound a little to recoup your
losses.
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Pretty soon, Robert was sitting on nearly
$30,000 in losses.
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Peabody shares dropped to under $2 a share
and he didn鈥檛 even care about making money
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anymore.
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He just wanted to get even, was praying to
just get even.
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When the company eventually filed bankruptcy,
Robert saw years of savings wiped out.
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This is the #1 trap for investors, especially
buy-and-hold investors that think of their
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time horizon as decades and can wait for a
rebound.
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People hate to sell at a loss.
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Even if a stock has dropped, it doesn鈥檛
feel real because you still own the shares.
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Investors think if they hold on, eventually
that investment鈥檚 going to rebound and they
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can get their money back out.
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But just like Robert, the market doesn鈥檛
play by these rules.
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Even if you hold onto a losing stock long
enough, you may never get your money back
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and you could be missing out on potential
returns in other investments.
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Just ask investors in Research in Motion,
now called BlackBerry, or Citigroup investors
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that are up 360% since 2009 but still down
87% from before the 2008 crash.
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So I鈥檓 going to give you three scenarios,
three reasons to sell a stock at a loss.
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It鈥檚 not going to be an easy decision but
you鈥檒l know when to make it.
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You鈥檒l be able to cut your losses in a stock,
reinvest that money into a better name and
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start earning those positive returns again.
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Not only will we cover those three reasons
to sell a stock but I鈥檓 also going to show
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you why I hate stop-loss orders.
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These are a favorite strategy of investors,
a strategy you might think will save you from
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big losses but I鈥檓 going to show you why
I call these guaranteed loss orders.
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I鈥檓 using this video as a monthly update
to our 2019 dividend challenge portfolio.
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I鈥檒l be highlighting three stocks in our
portfolio, three stocks that haven鈥檛 lived
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up to expectations, and using those three
scenarios to decide whether to sell these
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investments.
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I鈥檓 putting this video into our 2019 Stock
Market Challenge playlist so if you haven鈥檛
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seen the other updates, check those out.
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Along with some of the biggest investing channels
here on YouTube, I created a $1,000 portfolio
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in January and will be tracking it all year.
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To track my portfolio of dividend stocks,
I鈥檓 investing $1000 on M1 Finance, a no-fee
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platform that lets you pick your stocks and
automatically invests any new deposits across
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your group.
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With changes to commission-free trading on
most websites, a lot of you have asked if
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I still like M1 Finance even with lots of
choices for free investing.
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I still like it on that portfolio perspective
and the automated reinvesting across the entire
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portfolio.
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Basically, you can set your portfolio up to
automatically reinvest any dividends or deposits
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across all the investments and in the percentages
you set up.
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It鈥檚 great for that long-term, buy-and-hold
investment strategy.
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I鈥檒l leave a link to the playlist of videos
below in the description.
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I鈥檒l also leave a list of the current portfolio
of stocks in the description below as well.
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Here we鈥檝e got the portfolio as of mid-week
with a 20% return so far on the year including
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reinvested dividends.
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That鈥檚 4.6% better than the S&P 500 and
even beating the Vanguard Dividend Appreciation
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Fund and its 18.5% return on the year.
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We鈥檒l scroll through the holdings real quick
but I want to get to those three signals to
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sell a stock at a loss and the examples I鈥檒l
use from the portfolio.
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Of the 13 holdings in the portfolio, six are
beating the market with some real standouts
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like this 118% return on shares of Hanesbrands,
ticker HBI, and a 72% return on General Mills,
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ticker GIS.
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Two of these funds here, this Vanguard REIT
ETF, ticker VNQ, and the Vanguard Long-Term
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Bond ETF, ticker BLV.
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These have been critical in protecting the
portfolio from some of those big down days
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in the market and a lot of the reason we鈥檙e
beating the market right now.
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Check out the previous videos in the series
where I talk about why I added each of these
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stocks and what鈥檚 really driving these returns
but now I want to get to the losers.
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Those stock picks that haven鈥檛 worked out
and how I decide whether to sell or hold on.
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Our first scenario of when to sell a stock
at a loss, or at least when to consider selling,
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is when company-specific mistakes have hit
the shares rather than industry-wide weakness.
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Ford is a perfect example here.
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The 7% dividend yield is so persuasive and
shares trade for just 6.5-times on a PE basis.
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Despite the bargain-basement price, Ford has
been the worst performing stock in our portfolio
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with an 11.6% loss since adding it a few months
ago.
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But Ford鈥檚 losses haven鈥檛 been because
of management missteps or those company-specific
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problems.
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Comparing shares against the Global Auto Index
Fund, ticker CARZ, a fund of manufacturers
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and parts suppliers to the industry, you see
that shares of Ford have outperformed the
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industry over the last year.
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Going back even further, Ford鈥檚 pain has
been that industry weakness since 2015.
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Ford management is making the tough decisions
to guide the company through the environment
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and I still believe it can be a good investment
when that overall industry trend turns positive.
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Now if Ford鈥檚 losses were completely of
it鈥檚 own making.
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If the industry were doing just fine yet shares
of the company were falling on management
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mistakes or internal problems, that鈥檚 when
you want to consider selling a stock at a
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loss and investing in something else.
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A big part of successful investing is about
finding the best-of-breed companies in each
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sector or industry.
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We鈥檙e talking the leaders in each product
category, the companies with great management
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and a competitive advantage.
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If a company in your portfolio isn鈥檛 living
up to that standard, it鈥檚 time to cut the
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investment.
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Another situation where you might want to
sell a stock even at a loss is when another
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investment has a higher and more certain return.
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Now understand you can鈥檛 just be chasing
stocks, buying and selling the newest hot
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tip you hear on CNBC.
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Understanding this rule though is very important.
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Every investor thinks their fallen stock is
eventually going to get back to even.
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It鈥檚 part of that confidence you build in
your stock picks where you are so sure of
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something, you might even ignore the other
evidence to the contrary.
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There are two parts to understanding when
you鈥檝e just been plain wrong about a stock鈥檚
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fair value and whether to put that money in
a better investment.
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First is you have to analyze every stock on
all current information.
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This is a big one for losing stocks.
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It doesn鈥檛 matter how much you鈥檝e lost
or where the price was a week ago.
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You have to look at it as a new investment.
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So go back through your analysis, start from
scratch and look at the company as if you
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hadn鈥檛 invested yet.
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Would you still buy it?
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What is the fair value based on all the current
information and here you have to be impartial.
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Seek out the bull and bear case and take everything
into consideration.
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Now even if you look at the shares and they
seem like a good investment, the next question
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is to ask how long it鈥檚 going to take for
the stock to get back to that fair value?
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How many years is that and what鈥檚 it look
like as an annual return.
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Once you know all this, you can look back
in the market to see if there鈥檚 a similar
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stock, maybe a company in the same industry,
with a higher and more certain return.
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A good example here is the Alerian MLP fund,
ticker AMLP, we鈥檝e had in the portfolio
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since January.
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This is a fund of 32 companies in the energy
master limited partnership space, companies
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that own pipelines and storage facilities.
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It鈥檚 got a massive 8.4% dividend yield but
has done nothing all year with a 3% gain so
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far since January.
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Now that combined 11% return isn鈥檛 bad but
this one definitely hasn鈥檛 lived up to expectations.
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So even though I like that yield and the mid-stream
energy space, I have to question how long
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it鈥檚 going to be before fundamentals turn
around.
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Here it鈥檚 really a problem with the price
of oil and those global economic worries.
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Even on a massive outage at a Saudi oil facility
last month that took 5% of global production
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off the market overnight, oil prices are hovering
around their lows on the year.
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Fears of a slowdown in global growth have
demand estimates getting cut and a recession
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in the U.S. could seriously hit oil prices
and this investment.
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Last scenario here before we get to that reason
I hate stop-loss orders, why you absolutely
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need to avoid these.
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And the next scenario you need to watch for
is a major event against one of your stocks.
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Here we鈥檙e talking fundamental changes in
the business, scandals, lawsuits and just
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management issues in general.
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These include the five reasons to sell a stock
I talked about in a prior video, reasons to
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sell whether you鈥檝e got a gain or a loss
on the shares.
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I鈥檒l link to that in the video description
below so check that one out as well.
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It goes back to the idea that you have to
treat every investment as new when these kinds
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of big drops happen in the share price.
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When a scandal hits the company or management
decides to make a major acquisition that moves
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the business into a different path, you have
to reevaluate the shares and make sure that
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buy thesis still holds.
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Olin has been a big disappointment here, even
more so considering this stock was up 35%
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from where we bought it into late February
but has been nothing but bad news since.
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It鈥檚 now sitting at an 8% loss after management
missed earnings expectations two quarters
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in a row.
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The company lowered guidance for earnings
in July on a weak pricing environment and
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issues at a storage facility but there hasn鈥檛
been one single catalyst for the drop.
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It鈥檚 just been a slow bleed of investors
bailing on the stock.
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Third quarter earnings are expected November
1st so I鈥檓 waiting to get a sense of how
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management plans to get back on track.
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If they miss earnings for a third quarter
in a row, it maybe time to cut this one lose.
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Now I want to get to one of the worst investment
strategies you can use, the stop-loss order,
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and consider this something like a public
service announcement these things are so bad.
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First though, I want to get your feedback.
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We鈥檝e seen my three reasons to sell a stock
but what are yours?
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What reasons have you used to cut ties with
an investment and how do you make that decision?
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So scroll down and tell us in the comments
below, what other reasons do you use to sell
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stocks?
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Now on to that public service announcement
and why I absolutely hate stop-loss orders.
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A stop-loss order is a way to sell your stocks
based on the price.
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You鈥檙e telling your investing platform that
you want to hold the shares unless the price
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drops to a certain point.
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If that happens, you want the platform to
automatically sell the shares.
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Not that I would use it but here鈥檚 an example
of a stop-loss order on shares I own in ElDorado
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Gold.
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I鈥檝e put in a stop price of $7.50 a share
which means if the shares fall to that point,
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the platform will automatically sell my 10,000
shares.
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Now on the surface, stop-loss orders sound
great.
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It鈥檚 an automated order so you don鈥檛 have
to be watching the price every day.
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If bad news hits the stock and the price starts
falling, your shares are automatically sold
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at the earliest moment.
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The idea is that you stop any further losses
in the investment.
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A lot of investors will put in stop-loss orders
to sell if a stock falls below their buy price
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or a certain percentage below the current
price.
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The problem is, and this is why I call this
the guaranteed-loss order, is that you will
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never get that stop-loss price.
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You might put in a price at which you want
to sell the shares but the market just doesn鈥檛
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work that way.
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When the market panics on a stock, when bad
news hits and the shares tumble, that drop
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in stock price is immediate.
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Sure the price might drift lower through the
day but that initial knee-jerk reaction that
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sends it down ten or fifteen-percent, that鈥檚
all at once.
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What happens here isn鈥檛 that orders for
the stock are traded at prices all the way
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down.
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Hell No!
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You鈥檝e got the price before the news.
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The news hits and the market shifts what it鈥檚
paying for the shares down that 15% immediately.
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So going back to our ElDorado Gold example
with shares trading at $7.77 right now.
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If management came out and said they were
abandoning the company鈥檚 Greek assets, the
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shares would plunge 20% or more immediately,
let鈥檚 say to $6.22 a share.
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Now I might have that stop-loss order in for
$7.50 a share but the fact is, when those
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shares dropped, there was nobody to take the
other side of that order.
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Nobody wanted the shares at $7.50 a share
because this news took it down to six and
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change instantly.
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But that stop-loss order is going to trigger
because the shares fell through my stop price.
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Instead of getting my $7.50 stop price though,
I鈥檓 going to get the first price available
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which is that $6.22 a share where the buyers
start offering after the news.
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Besides the fact that you鈥檙e never going
to get that stop price you set in a stop-loss
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order, another problem with these is that
initial reaction to the shares is usually
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wrong.
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Have you ever seen a stock take a nosedive
on some bad news, fall like 20% at the open,
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and then drift a little higher through the
day.
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It still closes lower but not nearly as low
as that initial drop.
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Well with a stop-loss order, you get triggered
at that market open at that price on the knee-jerk
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reaction to the news.
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Your shares sell at that initial drop in price
and you miss out on the drift higher over
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the rest of the days.
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Now I know it sucks to see one of your stocks
drop hard on some news and it would be great
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to think there鈥檚 some magic strategy that
will save you from losing money.
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The market just doesn鈥檛 work that way and
stop-loss orders are guaranteed losers.
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Click on the video to the right to see how
I pick dividend stocks safe from a market
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crash.
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Don鈥檛 forget to look in the video description
below for that first video on how we set up
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our 2019 dividend challenge portfolio and
how to get started with dividend stocks and
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join the Let鈥檚 Talk Money community by tapping
the subscribe button.
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