December 12, 2011 | In: General

When to Dump a Stock?

You’ve been resilient, you were not afraid and were not greedy, and you’ve been patient, but a particular stock that you own is making you lose a lot of money. You are now entertaining the thought of selling it, but how do you know for sure that it’s now time to dump this stock?

Below are some factors that should help you make this decision. If most of these factors hold true, then you should definitely dump the stock:

  • You need the money: This factor alone should be a reason to dump the stock, even if you have already lost a lot of money on it, and even if there are many reports about an imminent rebound for the stock. After all, a bird in the hand is worth two (or is it 10) in the bush. Yes, the stock may go up in the next few weeks, but at least if you sell it now, you are guaranteed that you will have an x amount of (very needed) money in return.
  • The stock was overvalued when you bought it: This mostly happens to new investors. New investors don’t do the proper due diligence prior to buying a stock and quite often they are stuck with a stock (yes “suck with a stock” does rhyme!) that was overpriced when they originally bought it. It’s recommended for these investors to surrender their position in the stock as soon as they discover this fact, even if they have lost quite a bit of money on this stock.

  • The stock is currently overpriced: The investor may have bought the stock at a decent price, but the stock now is trading at a level that is technically unsustainable. It’s better to get out of the stock while the investor is actually making money on it.

  • The company’s main product is slowly, but surely, becoming obsolete: If the investor has shares in a company whose main product will most likely no longer be used within a few years, then he should dump all of his shares. There is no way for this company to ever recover. I can think of many companies whose main product is becoming obsolete, RIM is the first one on top of my head (why do people need these ugly BlackBerry phones and why do people need the primitive and restrictive BlackBerry messenger when they can have a better deal with WhatsApp of Viber?).

  • The company is no longer innovative: This is especially true in technology companies. If the company stops innovating, then expect its stock to drop substantially as soon as large investors notice (and they tend to notice pretty fast). Better to jump ship in this case.

  • The company’s competitors are getting stronger: Sometimes, the value of a company (and its stock) is high because it has no serious competitors, but once this company has real competitors, then these competitors will start stealing customers from the company and, consequently, the company’s churn rate will increase.

  • The company is mistreating its customers: Some executives sometimes forget that they are very well paid because their company is making money, and their company is making money because of its loyal customers. The #1 rule in sound business is to never mistreat your customers, yet some companies still do that, and think that they can get away with it like the good old times. Netflix is an excellent example, it treated its customers as cash cows and the whole thing backlashed on it because of the power of the social media. Netflix has lost many of its customers forever, and its stock, NFLX, that reached an all time high to just over $300 a few months ago, has now retreated to less than 25% of that price.

  • The company’s main industry is generally bearish: An investor should not hold to a stock whose main industry is bearish. Currently, the banking industry/sector is very bearish and smart investors have already dumped their shares in this industry.

  • Every report coming out of the company can be classified under “bad news”: If the company consistently delivers bad news to its investors, then the investors should sell their shares asap.

You should really, really, dump the stock if all of the above points hold true.

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