When Stocks Go On Sale, Please Don’t Bail!

These have been two of the most volatile weeks in history for those who own stock. If days like these leave you fearful, you are not alone…no matter how great of a stock picker you may be, no matter how high your conviction might be.

Can you keep from selling your holdings and stay long?

I see many posts on Twitter about people using this time to reallocate their holdings. To each his own…but I, for one, am not sophisticated enough to do that. Here’s why: I have no goddamned idea if it’s the right thing to do!

In 2001-02, the overwhelming majority of investors thought that eBay would ultimately be a better investment than Amazon. Again…how did they know that? The reality is, my friends…it is a guess. An educated guess, but a guess nonetheless.

I cannot tell you what the market will do in the next month, or two, or even six. However, in five to ten years, it will surely be higher.

Watching your account lose value day after day is the price of admission to the greatest wealth creation vehicle that exists.

So if you have some cash on the side, put that baby to work! You won’t pick the bottom, I can guarantee you this. However, in a year, you will be thankful you did it.

Times like this can be scary for new investors…but there is nothing to fear. Use these sell-offs to initiate or add to great companies whose price is on sale.

When people evaluate their losers, they tend to only focus on stocks they bought that lost value. They don’t always factor in the stock they sold in a panic that went up 300% after they sold it. That is a bigger loss than the stock you bought that’s down 50%.

 

My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.

Click the image of the book at left to be taken to its Amazon page.  (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)

 

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Guest Post: Reverse Stock Splits, by Chris Pascale

Hello, everyone. In today’s guest post, Chris Pascale is going to share his thoughts on reverse stock splits.

Reverse Split? Sell, Sell, Sell – By: Christopher Pascale

A reverse split is when a company reduces the number of shares it has on the market as a means of raising its share price. For example, if you own 100 shares of ABC Corp. at $2 per share, and the company enacts a 1:25 split, then your 100 shares are now 4 shares, and the price goes from $2 to $50.

The opposite of this is a split, which is commonly done at a ratio of 2:1, meaning that in the example above, your 100 shares would turn into 200 shares, but the price would be half as much.

Why Do Companies Split and Reverse Split?

A split is generally a very good thing. Share prices have gone up so much, and the company wants the price to keep going up, but worries that normal investors can’t buy shares if they are too much. So they cut the price in half at no cost to current shareholders.

Many times, the price goes up even more, and it’s possible another split is in the near future. For example, Microsoft shares have split repeatedly since the 1980s, which is why a share of the stock is only over $100, and not several thousand. By keeping the share price affordable, someone with only hundreds to invest at a time can still buy these dividend-yielding shares.

The reason a company does a reverse split is that its share price is too low, which puts it at risk of being taken off the stock exchange. But another way companies can stay in the good graces of the stock exchange is by making a profit! By increasing sales and being profitable, a stock will be valuable. No value is added with a reverse split.

Because the company is playing games instead of making money, it seems the logical thing to do in the case of a reverse split, at least in the short-term, is sell, sell, sell.

For some additional resources check out the following links:

Investopedia 

Zack’s 

Eric’s Book 

Christopher Pascale is an author, accountant and adjunct professor from Long Island. He is the former CFO of Portfolios with Purpose, and is a current member of the IRS’ Office of Appeals.

 

My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.

Click the image of the book at left to be taken to its Amazon page.  (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)