In the words of a wise investor, there are two rules to investing. Firstly, never lose money. Secondly, never forget rule 1.Why then, did I recently sell off a stock that lost me a fair amount of money, having dropped by 80% in the year that I held it?
This was a stock which had held great potential as it reported net cash positions every quarter, and with promising prospects as new factories were being built. However the share price kept dropping, seeming to ignore all the good news that were being reported. The market being inefficient were our conclusions. This view was reaffirmed as the company reported that it had successfully completed a private placement to major investors at a price which presented a premium of about 20% to its current share price sometime last year (can't really remember when). But yet, even with the consistent good news, the price nosedived as time went by, almost following the trend of Noble, albeit without all of the accompanying bad news.
What triggered the selling was ultimately an announcement that the company was going to have a 1 for 1 stock issue, of which the net proceeds would be used as working capital including salaries, administrative expenses, other operating expenses and other future expansions. The stock option was also issued at 1.5 cents, less than half of the then stock price.
So then, the question becomes, why did we sell? Firstly, the reason for the option, which included using the proceeds as ''working capital including salaries, administrative expenses' rang an alarm bell as it indicated that the net cash position that we had gone in for was possibly smaller than we thought or even be an accounting figure which had no real assets to back it up with. Secondly, it proved that there was the management of the company was incompetent, or had sinister intentions, as the option was priced way below the then stock price of approximately 3+ cents. Announcing the option had immediately caused the price to plunge 40+%, wiping out a ton of market value for its shareholders.
Thus, the decision was made to bite the bullet and sell the stock as both the fundamentals and faith in the ability of the company's abilities had deteriorated, and were deemed unable to recover. The base analysis for buying into the company in the first place was no longer there, and thus selling it, even at a big loss, makes sense.
TL;DR: Selling a stock, even when its at a significant loss, makes sense when the base analysis for buying into it in the first place has either changed for the worse, or completely disappeared.
