Year-End Tax-Selling — And Buying

It’s not too late to sell losers for a tax loss. (First, to reduce or eliminate your 2003 taxable gains, if you have realized any; then to reduce your taxable ‘ordinary income’ by up to $3,000 a year.)

But it may also not be too late to do some year-end buying – perhaps from people who are still cleaning out their losers.

As I’ve mentioned before, this can be one of those rare instances where both the buyer and the seller can be ‘right.’

Say a stock that got as high as $30 in some craze is actually worth $2 (to the extent anyone can know what a stock is worth) – but is now selling for 50 cents. For you or me, it’s a good buy at 50 cents (because it’s worth $2). For the genius who bought it at $30, it can be a good sell at 50 cents (because he gets a $29.50 tax loss on each share . . . and he also gets rid of the damn thing so he doesn’t have to keep looking at it on his statement each month). That tax loss now, at 50 cents, could be of greater value to him than waiting to take it later at $2 (if the stock ever returns to what we’re positing to be its true value).

Yes, this is a simplified example, and was way more apt at the end of 2000 or 2001, say, than it is here at the end of 2003. By now, most investors have probably harvested their tax losses from the bubble of the late ’90s. Not too many stocks fell from 30 to 2 this year.

Still, the point is that specific stocks are sometimes beaten down below their reasonable values – particularly in the last quarter of the year when people are doing their ‘tax selling.’

You could have bought 10,000 shares of a bankrupt manufacturer of women’s clothes, a company called KasperASL, for nine cents each – $900 – in December of 2000. There was a (very) slim chance that when it emerged from bankruptcy there would be enough, after paying off all the creditors, to leave some value for the shareholders. And, wonder of wonders, today, three years later, it’s selling for $6.90 – $69,000.

So these things happen, and, with hindsight, are relatively easy to spot. It is only spotting them in advance that is hugely difficult. (I knew about Kasper only because a designer I greatly admired was going to work there and I figured that, seeing as how he was my life-partner and all, I’d bet a little on his talent.)

But my point, again, is that irrationality is the rational investor’s friend. So if you find a stock people are selling out of disgust . . . they just hate this miserable son of a bitch stock (and themselves for ever having bought it) . . . or if you find a stock people are selling because they’re just sick to death of waiting (impatience being, similarly, the patient investor’s friend) . . . well, the odds with such a stock, while undeniably long, may nonetheless be tilted in your favor.

[Note that when buying penny stocks, particularly, the brokerage commission makes a big difference. At Ameritrade, for example, buying (and then selling) 100,000 shares of a 9-cent stock costs a total of $22 in commissions ($11 each way). A full-service broker would typically charge $4,000. Even some deep discounters have a per-share minimums, so check the commission before you make the trade.]

I don’t have any specific stocks like this to recommend, but one I’ve nibbled at, at 35 cents, has the symbol CICI. I’m assuming it will go to zero (really, the only sensible assumption under which to buy a ‘penny stock,’ as stocks selling for under a dollar are called) . . . but I’m also guessing it may have been beaten down out of irrational disgust (and rational tax-selling) at least a few pennies beyond a more objective value. Another is ILA, at $3.50 or so, down from near $40 in 2001. In a somewhat different category is CMM, at $10.15, of which I’ve written before. Many twists and turns along the way with this one – among them, preferred stock distributions and a reverse split. But my guess is that between its complexity and investors’ just getting tired of waiting, it could work out okay.

(Please remember, as always, that I really mean it when I tell you in these columns never to invest money you can’t truly afford to lose. I think it’s unlikely – though possible – that CMM would totally tank. But CICI certainly could.)