Bill Ackman, founder, and CEO of Pershing Square, recently realized a $400 million loss after liquidating the firm’s Netflix position, which he purchased in January. After Netflix reported earnings, the stock fell 35%. It currently trades for $218.24 per share, down 68% from its peak.
Pershing Square manages approximately $18.5 billion in assets, and the Netflix loss represents about 2% of the firm’s assets. No one likes to lose money, but cutting your losses and limiting your downside is wise, especially if you lose faith in the company.
The S&P 500 is down 6.44%, a challenging year, as market participants react to rising inflation, higher interest rates, and war in Ukraine. Several stocks are down 40%, 50%, and 60%, including Etsy, PayPal, Fubo TV, DocuSign, NIO, Uber, Spotify, Zoom, etc. What should you do if you own a loser or two?
My recommendation is to follow Mr. Ackman’s lead and sell your losers. Though he lost $400 million on Netflix, his firm generated stellar returns in 2021, so he probably can offset the gains with his loss. You can do the same thing. For example, if you own Vanguard’s 500 Fund (VOO), you can sell it to realize the loss and buy iShares Core S&P 500 ETF (IVV). You can recognize the loss and establish a new position in a similar security.
Bonds are performing poorly as well. The Bloomberg US Aggregate Bond Index is down 9.85%, matching its worst year from April 1979 to March 1980. If you own the iShares Core US Aggregate Bond ETF (AGG) sell it to buy Vanguard’s Total Bond Market ETF (BND).
When should you realize your loss? My answer is before a modest loss becomes a large one. Some investors wait until the end of the year to recognize losses, but then they miss out on opportunities to recoup losses or offset gains. We realized losses during the COVID correction in March 2020 through our rebalancing software and individual trades. As the market rebounded, we absorbed the losses with gains.
Be careful, however, if you want to buy back one of your losers. If you still like PayPayl but want to realize your loss, you must wait thirty-one days before repurchasing it to avoid the wash sale rule.
Investment losses are a fact of life; you’re not going to win on every trade, so when a loss occurs, use it to your advantage – never waste a good tax loss.
April 22, 2022
Note: Past performance is no guarantee of future performance.
 https://www.wsj.com/articles/william-ackmans-hedge-fund-sheds-stake-in-netflix-11650498903, Gunjan Banerji, April 20, 2022.
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