How I Sold These Stocks for a Loss, and Still Gained Almost 40%
Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I wrote an article in November, laying out part of my strategy for the 2012 tax year. Many investors were selling off big winners like Apple (NASDAQ: AAPL) in order to "lock in" their gains, in many cases in fear of increased taxes on future capital gains. I wrote another article in early December laying out why I thought that was a bad idea, going so far as to call it "dumb." Today, I'm going to show you how it worked out.
Again, the goal was simple: Reduce my taxes in 2012 as much as possible, and take those tax savings and invest them.
To achieve that goal, it meant selling whole and partial positions in several companies that I see as long-term winners, and plan to own shares of for years, if not decades. Let's take a look at what the share price of those companies has done in the two months since I sold:
Ford (NYSE: F), as many of you already know, really crushed it in December, and has continued to climb in 2013. On the surface, it looks like my decision to sell my Ford shares was a really, really dumb idea since I missed the big run up. However, I did retain about 35% of my Ford position that I have held since 2009, and am up over 50% plus dividends in that position.
And despite missing out on a great rally in the rest of my position, there's more to the story. We'll talk about it more a little later.
Corning (NYSE: GLW) has also had a nice run since I announced my intent to sell, jumping nearly 15%. It's important to note that 6% all happened on one day -- Nov. 27 -- on news that Corning was upping its forecast for sales of Gorilla Glass and LCD glass for Q4.
This kind of news is what makes jumping in and out of stocks, for any reason, risky. For an investment like Corning, 15% is a pretty decent year, much less barely two months. And 6% in a single day? Ouch, if you've recently sold for a tax loss, and plan to get back in.
Ameresco (NYSE: AMRC) saw an increase of 6.7% in the market rally, still trailing the S&P500's rally to end the year, while GT Advanced Technologies and (NASDAQ: GTAT), Ultra Petroleum (NYSE: UPL) have all continued see share price declines since November.
Great job, genius. Three of the five have gone up since you sold. Still feeling smart?
Like I have said, it's not that simple. Let's go over what I was looking to accomplish, because it had nothing to do with trying to time the market:
- Sell long-term losers in order to reduce my taxes for 2012
- Re-purchase the same dollar value of shares as I sold
- Take the "found" money from tax savings and add to these investments
- Add it up and see if I ended up with more money to invest, or less
First things first -- a couple of disclosures: I have re-acquired shares of Ameresco and GT Advanced Technologies at prices very similar to today's market price. Also, I retained all of my shares of Corning, in part because of the Nov. 27 forecast increase, and the fact that Ultra Petroleum's sharp decline was enough of a loss that selling Corning wouldn't give me any additional tax savings. So that leaves us with four companies that I sold. Here's how the math works out:
Total proceeds from sales: $2,883.70
Total loss: $3,071.63
So that left me with $2,883.70 to re-invest, and a maximum of $3,000 that the IRS lets me claim against my 2012 taxes. So what's next?
There are two very simple questions that will determine whether or not this exercise worked out for me:
- How much did you reduce your taxes by?
- Does that amount exceed the current value of the shares you sold if you had retained them? The "what if" value, if you will?
I will answer the second question first, but it's important to note that I didn't sell equal portions of all four companies. I evaluated what I should sell that would maximize my tax losses, while minimizing fees and retaining value.
What that ended up meaning is that while Ford shares have appreciated significantly, Ford only accounted for 17% of my "losses" while Ultra Petroleum and GT Advanced Technology combined for over 63%. Simply put, this means that Ford's rally has a relatively small impact on the overall "what if" amount.
So what would the share value be if you hadn't sold?
"What if" value today (Jan. 16, 2013): $2,833.98
That's right. It's actually a little bit less than what I started out with. But there's more, in question 1:
Tax savings for 2012: $1,050.00
So if we take the actual proceeds from above, $2,883.70, and add that to the "found" tax savings money, $1,050.00, that leaves me with $3,933.70.
That makes for a 38.8% gain.
And here's where, as has been famously said, the "magic of compounding interest" comes in to play. If I am able to simply capture the market average return of 7%, my "free" $1,099 will be worth over $4,000 in 20 years, when I'm contemplating retirement. And that's pretty amazing.
Foolish Bottom Line
Honestly, I wasn't expecting a nearly 40% gain, but I was very confident that I would be able to net a positive return. And while others were selling off investments out of fear that future tax rates will be higher, my philosophy is based on doing everything that I can do today, to maximize how much money I have invested, because the best hedge against higher taxes down the road is to have as much money as possible! And that means keeping as much money invested as I can.
And while it's only January, now is a great time to evaluate your portfolio and income situation for 2013, and be ready to take advantage of every tool at your disposal to generate as much return as possible. So get to work already!
I'd love to hear what you think. Please share your comments below!
elihpaudio owns shares of Ameresco Corning, Ford, and GT Advanced Technologies Inc. The Motley Fool recommends Ameresco, Corning, Ford, and Ultra Petroleum. The Motley Fool owns shares of Corning, Ford, and Ultra Petroleum and has the following options: Long Jan 2014 $30 Calls on Ultra Petroleum, Long Jan 2014 $40 Calls on Ultra Petroleum, Long Jan 2014 $50 Calls on Ultra Petroleum, and Short Jan 2014 $20 Puts on Ultra Petroleum. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!