Do you have losing stocks? Here’s what Warren Buffett says to do

You can be the best stock market investor on earth, and you’ll still have regrettable investments. Your wallet will always have a few stinks in which you have lost money. It’s happened to Warren Buffett and surely every lesser investor.

As you strive to become a better investor over time, making fewer mistakes and making more money, you’ll need to figure out what to do with those losing stocks. Here’s a look at what Buffett, the CEO of Berkshire Hathaway himself, recommends.

Image source: The Motley Fool.

Your choices with losers

If you’re looking at an underperforming stock in your portfolio, there are several things you could or should do:

  • Assess its potential. Yes, it may be down, but is it a big company with a rosy future that is temporarily down, like many great stocks are these days? Or is the company facing unsolvable problems? Look more closely.
  • Consider hanging on. If the company’s problems seem temporary, consider hanging on. Remember that just about every great long-term performer you can think of, such as Apple, Microsoft, Costcoand so on rose in value phenomenally – but they didn’t do it in a straight line.
  • Consider selling. If the business is facing one or more problems that seem difficult to overcome, such as a new competitor eating their lunch or a debt that is piling up faster than it is manageable, it may be a good idea to sell.

What Warren Buffett recommends

Here’s what superinvestor Warren Buffett advises about losing stocks in your portfolio — he said it at one of his annual shareholder meetings in the 1990s:

It is true that a very important principle in investing is that you don’t have to get it back like you lost it. …And actually, it’s usually a mistake to make, to try to get back the way you lost it.

Buffett probably said this because he knows many investors make this mistake. Here’s what it looks like: Imagine your portfolio has good and great performers, and a dud or two. You invested, say, $5,000 in one of these underperformers, and that stake is now worth $2,000. You’ve lost $3,000!

Perhaps sales are low and declining, with few people interested in the company’s products or services. The future doesn’t look good for the business, but you don’t want to sell, because then you would suffer a loss of $3,000. So you hang in there, hoping stocks will rebound somehow. Well, that’s not very likely to happen. This strengthmaybe, but it’s unlikely.

If you were to simply sell what’s left of that position, bringing in about $2,000, you could move that money into a different stock that you have much more confidence in, a stock with a greater chance of rising in value. You box make up for the lost $3,000, but you have a better chance of making it up with a different, more promising action. As Buffett advised, don’t try to come back like you lost it.

Keep Buffett’s advice in mind whenever considering losers in your portfolio.

Selena Maranjian holds positions at Apple, Berkshire Hathaway (B shares), Costco Wholesale and Microsoft. The Motley Fool holds and recommends Apple, Berkshire Hathaway (B shares), Costco Wholesale and Microsoft. The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), long $120 calls in March 2023 on Apple, short $200 calls in January 2023 on Berkshire Hathaway (B shares) , short calls of $265 in January 2023 on Berkshire Hathaway (B shares) and short calls of $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.

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