“At what point do you take your losses? I’m the same stubborn and egotistical person you are and it’s not fun to take a loss (and if you haven’t sold: no loss!). My investment club purchased MLG at 7 (unfortunately, it was my presentation and they never let me forget it), so with your theory and mine and those Beardstown ladies, we kept purchasing more all the way down. This week I have to face them and the price of MLG has hit the magical number of 15/16. Translation: for the price of 7 CD’s you can own 100 shares of stock. So would you have sold at say a 25% loss or at what point would you reassess a stock?” — Janelle

Clearly, this is a CD problem. You paid $700 per 100 shares of this stock, which now could be traded for seven (rather cheap) compact discs. What you were supposed to do was spend $700 on a stock that could one day be traded for seven $1,000 certificates of deposit. This is EXACTLY the kind of mistake Roseann Roseannadanna used to make, and while funny on “Saturday Night Live,” it has no place in your investment strategy. The market is not even open on Saturday night. Is this an investment club or a bunch of gals who get together with a few six packs to watch TV?

Of course, to say that I have made the same mistake myself many times would barely begin to express the depths of my empathy. I bought 500 shares of one stock at $4 (the underlying real estate alone, the expensive research report disclosed, was worth $5) that has by now led me to own so many shares at three-sixteenths bid, nine-sixteenths asked, that (a) I now own nearly 1% of the company and (b) if it ever struggles back to a dollar a share (it was once $153), I will be rich beyond imagining. Or flush, anyway.

So I feel your pain.

But I know nothing about MLG, other than it seems to be the symbol for Musicland Stores, which must be how you got confused about the CDs. If they’re selling seven for $93.75 (the value of 100 shares at fifteen-sixteenths of a dollar per share) — or $88 plus tax — that’s the first problem. They’re selling them too cheap. No wonder the stock tanked.

That concludes my knowledge of and opinions on MLG. Why not sell it for the tax loss and buy an equivalent amount of some other wild speculation like the one I’m stuck in? Common decency (not to mention embarrassment) prevents me from naming it in public. But there are loads of ridiculous under-a-buck speculations out there. If you can’t find any on the New York or American Stock Exchanges, just head up to Vancouver. Any one of them should serve to complete what seems to be your journey, on this particular flier, toward a total loss.

The real answer? Reassess whenever something major changes, either in your company itself or in the world that would affect the company (or, of course, when the stock price hits your target). And, tax considerations aside, sell when you no longer think the stock represents compelling value. It’s as simple, and as difficult, as that. Maybe you were wrong about this company, or maybe something happened that you didn’t foresee.

Then again, I remember when Compaq first came out at $10 — pre-splits — and fell to $3 not too long afterward. Holding on would have been a very, very good idea. So if for some nutty reason you think Musicland might be another Compaq, double up your position now, wait 31 days, and then sell the original shares for a tax loss.

  • If you don’t wait, the IRS will disallow the loss as a “wash sale.”
  • If you don’t double up — that is, if you sell now, wait 31 days, and then go to buy it back — the stock will have quintupled in the meantime. Don’t ask me how, but Mr. Market knows and takes special pleasure in maneuvers like that.

PS – One reason to take a tax loss on MLG is to shelter the gain from some other stock your club might have in mind to sell. Is there anything, with the market having risen six trillion percent in the last fifteen minutes, you feel might no longer represent compelling value?

 

 

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