This is first of a series of video interviews in which Pat McKeough will give his investment advice on a variety of topics. Some will deal with his overall investment philosophy, others on specific investment strategies and still others will be comments on events that are affecting the markets and the economy. Today he answers a question from a TSI reader on how to react when good stocks start to slide.

Below is the transcription of Pat’s comments.

When Good Stocks Go Down

Q: Pat, here’s an interesting question from a reader. You’ve got a good stock that’s been going up for years and then it starts going down. When do you get rid of it? What percentage loss do you let go of it at?

Pat McKeough: That’s one of those things—people assume good stocks go up like a bunch of people in an elevator. What really happens is that most stocks go sideways for unpredictable periods, and then shoot up. If you try to be in the stock only when it’s shooting up, you’ll wind up buying at peaks quite often, because the shooting-up portions of the stock’s life are unpredictable. Unfortunately, sometimes stocks go down for a bit, and you think, now I’m buying on a dip. Great! And then they go down some more. You might say to yourself, I’ll stick with it until it drops 5%, or I’ll stick with it until it drops 10%.

Unfortunately, there’s a random element, a stock can drop 5% or it can drop 10% and that says nothing about what happens next. And I can tell you the fact that you own a stock that’s dropped 5 or 10% also says nothing about what it’s going to do next. So you shouldn’t let that influence your decision on whether you hold or sell.

What you should do is look more closely at a stock that goes down. Say to yourself: Is there something I’m missing here, is there something that’s deteriorating about this stock, something that’s undermining its value? And if there is, of course you should sell.

But it may well be one of those random elements that comes along that you just have to accept. The point of investing in a portfolio instead of just one or two stocks is that while some of your stocks are randomly going down, others will be going up. What you really need to look at is what are your long-term total returns and not fret over one particular high-quality stock that happens to be going counter to the market and losing ground.

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