“I will sell this ABC losing stock only when I get my capital back. I don’t mind holding it for the long run.”
This thought is what creates a lot of “forced” long term investors – people who stay invested in a bad stock for the long term because they don’t think they have an option to sell it.
One suggestion I gave was to hold on to businesses he knows are “obviously” good, and sell the ones he knows are “obviously” bad, irrespective of what those stocks have done in the past.
“Your cost price does not matter when you are looking to decide what to do with a stock in your portfolio. What matters is today’s stock price – assuming it’s a good business and you are looking to buy that stock afresh today – and your expected returns from it over the next 10 years.” If you wouldn’t buy more of a stock today on which you have a loss, Sell it. Don’t wait to “get even.” Chances are there are better ways to invest your money.
Every 90% loss begins with a 10% loss, and then goes to 20%, then 30% and so on. So, when you realize you’ve made a mistake in the matter of stock selection, it’s better to take the loss sooner, not later.
Buffett noted in his 1996 letter to shareholders that…"We continue to make more money when snoring than when active. … [Y]ou simply want to acquire, at a sensible price, a business with excellent economics and able, honest management. Thereafter, you need only monitor whether these qualities are being preserved." The last sentence gives us the first clue about when to sell: if the company no longer provides “excellent economics” or is no longer run by “able, honest management.”
Thus, if your original investment thesis is no longer valid, consider getting out regardless of the stock price.
Recognizing your losers is hard because it’s also an acknowledgment of your mistake. But it’s important to do that sooner than later.