Don’t cut your losses, lower your cost basis instead

I didn’t wake up this morning thinking, “this seems like a great day to blog about cost basis.”

I promise.

I was curious to see how the market would react to all the tax news that broke over the weekend, I will say that. I had stocks on the mind … just not cost basis.

Now that the market is closed, though, and I took a peek at my portfolio (which I do every night), I saw something that got me thinking about it. Not cost basis itself, I guess, but the power of lowering it.

I’m a big fan of buying low and selling high. I haven’t met an investor who isn’t. Sometimes, though, I just buy stocks because I really want them in my portfolio. You’ve been there, right?

Well, when I do buy a stock that’s been on a pretty good run, or one that’s creeping close to a 52-week high (or even an all-time high knowing this market), I always make it a point to try and lower my cost basis whenever possible. If I buy a stock at what appears to be a premium price, you better believe I’ll buy that same stock if sentiment shifts and it loses its steam.

I know I’m not breaking any news here, or shining light on some concept people have overlooked. Lowering your cost basis whenever possible is just simple common sense.

It can also be pretty powerful … something I found out first hand today.

Let me explain.

This story starts back on May 5th, when I purchased a share of Foot Locker (FL) for $76.77. I was proud of that purchase. The dividend was small, but growing, the P/E ratio was low, the company had next to no debt and it was making a ton of money.

There was a lot to like … or so I thought.

Apparently, not many people agreed with me as, over the course of six long months, the price slipped all the way below $30. I only owned one share – a tiny part of my portfolio – but it didn’t matter. Watching it tumble by almost $50 was rough.

I knew I had to do something. I could’ve sold it and cut my losses – the thought certainly crossed my mind – but I, believe it or not, still saw a lot to like. The dividend yield, for example, jumped from just over 1% to nearly 4%.

See where I’m going with this? When you own a stock and it starts to go south, you have three options.

  1. Do nothing
  2. Sell and cut losses
  3. Buy more

Instead of selling or just sitting around and resenting the fact I bought the stock in the first place, I went with option No. 3 … I bought more. I picked up two shares for $29.96 apiece, lowing my cost basis from $76.77 to $45.56 in a matter of seconds.

Now, I’d like to say I knew it was going to go on a big run, but I just can’t. I only bought the shares to lower my cost basis. Guess what, though? Thanks to today’s 5.66% jump, my three-share position is now up a whopping $0.42. I know $0.42 isn’t much, but it’s better than $50 or so in the hole.

Now, instead of taking a $50 loss and moving on with my life, I have a three-share position worth $137.10 that shells out $3.72 worth of dividend annually … and I see the share price and dividend going up even further from here.

Cool story, right? I’m pretty fond of it.

March on!

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