What's the Value of Your Stocks?

I love buying, holding, and selling stocks! And that's no secret. I was recently asked a few questions regarding stock buy, hold, and sell decisions. I have permission to paraphrase that conversation. So here we go:

Question: Up until about a year ago my stock account purchased and sold several stocks. After purchasing a particular stock, the selling obviously stopped. I am curious as to the reasoning behind that. Was it because the economy tanked and the stock dropped in value? Was it because the stock was really stable (or at least more so than others) and it would ride out the economic storm? Was it because the dividend was really good so I should just let it stew for a while?

I am just curious as to the reasoning that goes behind stock trading.

I think I like the idea of having multiple stocks. Right now we have all the cash in just one. Would you recommend me adding money to the account so we can purchase more of that one stock or would you think it better to look at other stocks while that one simmers?

Just trying to pick your brain. Thanks again, friend.

Answer: Some people would look at the current value of a declining stock and become a scaffolding full of scofflaws! Indeed, risk tolerance is a big part of stock market investing and that's why it shouldn't bother you right now that your stock account isn't soaring through the rafters.

You asked about your current stock holding. I answer:

There are a few emotional things that you can do when a stock you are holding starts losing value. First, you can panic and sell off the stock before it loses any more value. Second, you can grudgingly go down with the ship saying to yourself: "This is MY stock choice and I'm sticking to it!" Finally, you can put your emotions to the side and think about it logically.

That's what I try to do when it comes to stock investing. Taking a logical view means understanding what the real value of the stock (company) is. Here are a few logical views on valuation:

First, you may have bought the stock in a bullish market (rising in value) with the sole ambition of having it swing up with the market. Second, you may have bought the stock because you thought that its value would increase over time because of the company's operations (not necessarily the market). Finally, you may have bought the stock because it pays regular and reliable dividends.

The latter is the case with your stock. If it had been a purchase relying on the market for its increase in value, then I probably would have sold it when things started sinking and before they got too low, because the VALUE of the stock changed in tandem with the market for me. In the other two scenarios listed it is smart to hold onto the company until either one of those two criteria stop being applicable (in other words, I would sell if I no longer thought that the company's operations were going to increase its value or if it lowered or suspended its cash dividends). Your stock looks like a dividend stock from the beginning. Since its first declared dividend in 2004 it has yet to decrease or omit any payments! In fact, in that time the dividend has increased by almost 16%!

In a nutshell, since the purchase of your stock, you have received equal dividend payments. You'd be lucky to find that kind of solidarity of return anywhere else in this economy aside from strong stocks in the market! The beauty is that you will keep getting that return whether the "value" of your stock goes up or down in the market. However, the moment the company is unable to sustain those payments, that would be a good time to sell off.

My advice would not be to put more into the one stock you have simply in the spirit of diversifying. If you wanted to start adding some more money into your investment, I would suggest getting at least $500 before purchasing another stock. I've found that stock purchases with less money than that are counter-productive because of the commission on each trade.