Mike, Odd the way that you raised "taxes" as the reason not to sell an overvalued stock in a company you like over the long term.
Let's say stock XYZ goes from 0 to 200.
Two people. We'll call them Mike and John. Both buy 1000 shares of XYZ at the very beginning for might as well be zero (maximize the effect of tax as a reason to hold). Both pay LT capital gains at say 30%.
When it gets to 200, both say "it's over valued" and should be worth $100. As you so boldly asserted, Mike is not so, um, stupid to sell because he's done the tax math. John is more politely "blithely ignorant" and sells anyway. John gets whacked with taxes (30%) and ends up with 200,000 - 60,000 = 140,000 and no shares.
Both were right and the stock really is worth $100 (inflation adjusted current dollars). Let's say in the process of adjustment it dips back to $50 but John's too chicken to buy. He waits. Almost too late he misses most of the runup and buys back in at $70. He holds 2000 shares.
Later they both sell for its long term fair value of $100 a share. At which point Mike faces 30% of $100,000 capital gains for a net take of $70,000. And his stupid friend takes a $20,000 capital gains hit on his $200,000 and emerges with only $180,000.
Hmmm... If that's stupid, I'd rather be stupid.
Try it out on a range of scenarios.
The only criteria of the model are that you sell it when it IS overvalued and buy it when it IS undervalued, where the definition of "fairly valued" is what you will end up selling it for out the other side.
So of course one gets in a mess if one's definition of overvalued and undervalued are flawed. But that's a different topic.
For a stock with no dividend yield, selling and buying back THE SAME STOCK a lower price is always advantageous after tax compared to holding right on through. At least, I couldn't concoct a scenario where this wasn't true (after tax).
You assert that you felt Siebel was historically overvalued. There at least we agree.
However, I don't understand then why you didn't sell it, planning to re-invest the proceeds when it was less historically overvalued.
Unless (a) you expected to get even more historically overvalued, or (b) you hadn't figured out the tax part, or (c) you were behaving irrationally.
Now, I never would have used the word "stupid", but feel free to label our respective behavior any way you wish.
I prefer to use the less pejorative word "irrational". Which is how humans behave most of the time, because we aren't computers. We get carried away with the rush of things or do things for emotional reasons. I still hold Laidlaw for example. That's the height of irrational. Why I didn't use the tax loss to reduce my tax basis last year is beyond reason. But I still have those 350 shares. So I am irrational and proud of it.
Many people seem to get very defensive when faced with their own irrational behavior.
As to whether what I am posting is mere theory? Well, this is precisely what I have done with my portfolio. At least the sell part. I am waiting for the return from the bottom (whenever that is/was) to re-establish positions. And I am somewhat confident that I will be able to re-enter all of my positions with a larger number of shares than if I'd just held right on through.
And that's a fact.
Why do my posts sound like theory? Maybe because I am articulating my reasoning. Which is theory.
And it's my theory. But at least my money's where my mouth is, and that should count for something.
John. |
