Evaluating Your Underperformers

During the recent sudden meltdown in many small-caps, I missed cutting my losses at a reasonable point in a number of positions. I have a number of excuses as to why that happened, but that is irrelevant and doesn't change the fact that I now have some positions that are quite severely underwater.

So after lecturing yet again on how important it is to not let losses grow too big, how do we deal with these stocks that we are still holding and have let slip down too far?

The approach I take is to look at the stock as if I hadn't already owned it. Would I buy it today at the current price and if I did, where would I set my stops? I would then be particularly vigilant in making sure that I was ruthless with my money management.

The big danger in a situation is that it can be very easy to suddenly turn into a value player. If you thought the stock was a good buy 20% higher, than it must be a truly exceptional "value" down here. Perhaps it is, but that doesn't mean that you completely drop any sort of money management.

If you are sitting way underwater in a stock, don't ignore the situation or act rashly. Revisit it with a new mindset, and then make sure you stay disciplined with your stops going forward.

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James "Rev Shark" De Porre is the founder and CEO of Shark Asset Management, an SEC-registered investment advisory firm. He also operates sharkinvesting.com, an interactive online community that serves and educates active investors. De Porre holds business and law degrees from the University of Michigan, is a member of the Michigan Bar Association and a former tax attorney and CPA. He lives in Anna Maria Island, Fla., with his wife and two children.Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback; click here to send him an email.