Tax Loss Selling
2019-12-18 | David Starr
When people learn what I do for a living, they are sometimes confused about the difference between investing and trading. I have an analogy I like to use about two different people finding a Louis Vuitton handbag at a thrift shop. One looks at it and covets the quality, hand-stitched leather, and likes the style and knows that the bag can be used for years. The other, knows that the bag, even used, can sell online for much more money. They both want to buy the bag, but the first is an investor and the other’s a trader.
Investors and traders both perform the same activities, they buy and sell securities. But while investors need to make sure they’re buying is not only a good price, but also gives good value for that price. Traders, on the other hand only care about the price. As traders, we each have our own techniques for finding things to buy which we can then turn around and sell for more. It could be a pattern on a chart, a technical indicator, or a special circumstance. But no matter what the technique, traders need to be disciplined and only enter the trade when everything is setup just right. That’s why so many traders are fond of saying that they’re paid to wait.
One of the things I wait for each year is tax loss selling. You see right at the end of the year many investors will dispose of stocks with unrealized losses just to better reduce their taxes. This phenomenon is no secret and the market makers, and other buyers who’d normally take these stocks off their hands, will often walk away from the bid so that the forced sellers who only have hours to exit their positions have to keep offering it out at lower and lower prices to get out. When it snowballs, sellers start tripping over each other trying to run for the exits. When they do, it’s the stock market equivalent of finding a luxury handbag at the salvation army store.
So here’s the thing: you don’t want to buy just any old stock that gets sold at the end of the year. Some of those loser stocks, which others are discarding, are losers for a reason. (Not the Louis Vuitton, but the lime green polyester sports coat.) You need to know which stocks have a good chance of turning back up, and which ones don’t. You also need to know the signs that the selling’s reached a crescendo and is about to abate. Just because a stock has sold off, doesn’t mean it can’t sell off more, and you want to avoid being trampled by a horde still trying to exit.
Now that I’ve ranted and raved about finding a great steal for an even better price, here’s the best part. I’ll share with you my trick for knowing what to buy and when to buy it. It’s easy. I let my colleague John Carter do it for me! In all styles of trading, experience matters, and for a technique which can only be used once a year, it takes time to get the practice necessary to become a master like John. Luckily, in his yearly Tax Loss Selling live-trading session, he shares his techniques. But he also walks through the process live as he searches for stocks that’re getting tossed overboard at discount prices. I get a chance to piggy-back on his ideas while I build up my own experience. If you’re interested in finding your Louis Vuitton in a Salvation Army bin instead of a brand-name store front, this is the perfect opportunity to do so.
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