Stocks have fallen over the past month and certain stocks have fallen considerably. If you have lost equity recently and can find similarly positioned stocks, it may be wise to consider some lateral moves. Selling one stock and buying something comparable allows you to claim a loss while still remaining fully invested.In this way you do not have to observe the 30-day rule where you cannot claim a loss in a stock sold today if you buy it back until after 30 days have past. In 30 days the market opportunity to repurchase the shares of the company you sold at good price may have also past.
The following are a few examples. If you are a Microsoft Inc. (MSFT) shareholder you lost 14.5% in the last month. I would say that the drop is totally absurd given the highest profit margins, cash-flow, and piles of cash in the universe, all on top of new products like Windows 7, Bing and Office, hitting the market at the right time. Regardless, if you had invested $10,000 then you are down $1,450. If you sold the stock you would get the deduction to offset future gains.
The following chart for Oracle (ORCL) indicates a similar 30-day decline, in this case about 15.3%, or a $1,530 loss on $10,000. To capture the loss you sell one large software company for another, and remain fully invested. If the market were to rise you get the increase in value but will save on your taxes. In 31 days, if you should so choose and the pricing is again comparable, you could re-trade again. If the market is up -- wonderful. However, if it is down reversing course would again lock in additional losses and the corresponding tax benefit.
The next chart compares the path of both stocks over the past two years, during the financial meltdown. You can see the similar paths. The correlation will not necessarily hold true over longer periods of time, but it does hold true for our purposes here.
Moving on from the software industry to the hard hit oil industry, you can see the chart for Chevron Corp (CVX) indicates a loss of 10.7% in one month. There are plenty of lateral moves you can make in this industry.
ConocoPhillips (COP) lost 12% over the last 30 days, which is greater than Chevron did, so this is not an exact science (actually, no relation to science at all) and you would be wise to consider your alternatives when making any trade but there is value to be captured here.
In the case of of Chevron and ConocoPhilips, the blended chart for one-year and two-year periods diverge. The one-year chart shows that the fortunes of both companies were about parallel.
The two-year chart gives us a different picture, with CVX beating COP by about 20%. This difference is why such lateral moves should receive all the same deliberation as you would any totally new position. You always have the possibility of making the wrong bet. In addition, had you made such a lateral move two months ago and one of your selections had been BP P.L.C. (BP), you would find yourself taking a significant loss, without warning.
If you did take a hit in BP there are trades that you can make here too among equally squashed stocks. While their dividends are not comparable and that does make a difference, you might feel like Transocean (RIG) or Anadarko Petroleum (APC) has more potential of returning to glory and has been hurt more by headlines than earnings issues
If you are looking for greater dependability and do not want to wait to see if and when BP gains back some of its lost glory, but also want to have long term exposure to the oil industry, you can trade from a loser to something more dependable. For that there is always ExxonMobile (XOM).
The examples of lateral moves I have given keep you in one industry. However, you could base your decisions on other likenesses such as dividends, or growth potential, or cash-flow and return on equity. If you want to remove some of the risk and lock in greater tax benefits, consider making three or four lateral moves. If you did so across industries, you are even safer.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: He own shares and / or options of APC, BP, MSFT, and RIG.