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"Never Close a Pick in the Red"

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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.  

3 Comments – Post Your Own

#1) On June 05, 2009 at 9:33 PM, portefeuille (99.59) wrote:

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 have ended some "outperform" calls that were "in the red" and re-started them the same day or a day later. That is my "caps" game equivalent of "averaging in" or "throwing good money after bad". It has always worked so far, I think. By that I mean that the second "outperform" call has always gained more than the first one had lost.

I think it is often a good idea to "throw good money after bad" ...

 

Also consider "catching a falling knife" (see this post). From that post:

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I would say that some 80% of those picks were cases of "catching a falling knife" - maybe not such a bad idea after all (around 70% of my portefeuille picks fall into that same category).

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#2) On June 06, 2009 at 1:09 PM, RonChapmanJr (92.59) wrote:

In CAPS land, closing a pick in the red is a bad idea 99% of the time if you have a long term view of the game. 

Why?

Because points are much easier to come by than accuracy. 

ron

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#3) On June 06, 2009 at 3:37 PM, portefeuille (99.59) wrote:

In CAPS land, closing a pick in the red is a bad idea 99% of the time if you have a long term view of the game. 

Why?

Because points are much easier to come by than accuracy. 

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Yes, but no one should care about accuracy. (add a few of greater that 1000 adequate links here.)

 

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