Monday, June 8, 2015

Realizing Losses

Some people claim that if you own a stock whose market price falls below your purchase price you haven't actually lost money unless you sell the stock.  This is nonsense of course but what is true is that you can't write the loss off on your taxes unless you sell the stock.  So from a tax point of view it makes sense to periodically eliminate losing positions even if this requires you to acknowledge error. 

In this light last Friday I sold out my position in Ensco (ESV) a company which owns and leases out offshore oil drilling rigs.  I had bought this stock in March 2014 (at a price of about $48 per share).  In hindsight I was unduly influenced by the 6% yield (at the time) which should have been a warning sign.  I also was operating on the assumption that oil prices should be expected to rise over time and underestimated the risk of a price drop.  When the oil price did drop so did Ensco's dividend (cut by 80%) and stock price. 

I received about $24 per share when I sold.  So I lost about $24 per share or 50% of my original investment.  But by selling I will be able to write the loss off on my taxes (perhaps over several years).  I estimate this will result in a tax saving (federal and state together) of about 25% of the loss or $6 per share.  Which is better than nothing.

I have some more underwater (i.e. currently losing) stock positions but I let them be.  They weren't down as much and I have more faith in their future prospects.  The problem I see with Ensco is that new US shale oil may now (in large part) be cheaper to produce than new offshore oil.  In which case the demand for offshore drilling rigs will remain severely depressed indefinitely.  With predictably bad consequences for Ensco's profits and stock price.