TMFBabo (100.00)

"Never Close a Pick in the Red"

June 05, 2009 – Comments (3) | RELATED TICKERS: R , ED

Never close a pick in the red

I agree with that statement for the most part, but I don't think it's always true. Here are a few limited instances where I would disagree:

1. Mistiming with an ultra: 'nuff said.

2. If you regularly keep 200 picks open and your red might stay red for 6 months, I'd say close it now.  If you can do something productive with that spot, I think it's better to close the pick and start gaining points with that spot using other picks. 

3. The fundamentals have changed: let's say you green thumb a stock and it suddenly loses its earnings power.  The stock then tanks before you can close it out.  Now you have an underwater pick that won't get better anytime soon.  Close it out! 

More money has probably been lost by investors holding a stock they really did not want until they could "at least come out even" than from any other single reason.
- Philip Fisher

I closed my 3rd pick in the red today: NCTY.  As many of you know, The9 Limited lost its license for the game World of Warcraft in China, which accounted for the majority of NCTY's earnings.  The stock then tanked.  I was going to keep it open for a long time, but I've recently begun using all 200 slots, so I decided I want the slot to be used for better purposes.  I figure it could be a long time before my pick is green again, and I simply need that slot available.

Reasons 2 and 3 actually have parallels to sound investing. 

Let's start with reason 2.  A lot of people ask when you should sell a stock.  What's the answer? To me, it's when you can do something better with that money.  Let's say you buy undervalued stock A and it goes up 100%.  You love stock A, but it's no longer as cheap as when you bought it.  You have to re-evaluate that pick and compare it to stock B.  At today's prices, which one is the better investment? Stock A or B? You must use the current prices of both stock A and stock B.  Maybe stock A used to be a better investment, but now stock B is, since A went up 100% and B only went up 30% in that timeframe.

Anyway, like I said before, if you could do something better with the money, you should normally sell a holding in your portfolio and buy the better company.  If you use all 200 spots in your CAPS portfolio and you have a pick that's just languishing, you may want to sell, cut your losses, and make better picks next time.  

Reason 3 doesn't need much explanation.  If the fundamentals have worsened: NCTY's loss of WoW, some factory burns down, whatever, then it might  be good to close out your pick because there was no way to have predicted that.  Maybe others saw NCTY coming, but NCTY was just a random stock from my many stock screens, so I for sure didn't.  

Anyway, I plan on keeping most of my picks in the red open.  I don't think it's smart to just keep closing red picks, since you'll ruin your score.  I do think, however, that it's smart to close one for a good reason.