It’s Tax Loss Season. This is the time of year when many investors with big gains on some investments take losses on others to offset their gains for the tax year.
The good news is that—unlike many previous years—many of our favorite metals and stocks are up substantially this year.
Despite many setbacks, gold, silver, and uranium are doing great. Copper, zinc, and others have caught up recently. I’m not worried about my portfolio. But some of my stocks are down, of course, and could get whacked even harder in the weeks ahead. In most cases, I’d see that as an opportunity.
Here are some general Tax Loss Season considerations to keep in mind:
- It doesn’t matter if the company is great and share prices seem likely to rise again. If a stock is down significantly, no matter how great we may think it is, some shareholders will sell for the tax loss. They may even intend to buy back in next year (or after 30–61 days have passed, to avoid trouble with the taxman). Regardless, the selling pressure could be substantial.
- Our personal gain or loss doesn’t determine vulnerability either. To estimate a stock’s vulnerability to tax-loss selling, you have to look at its performance over the last year (or however long it takes to turn over the float) to see if most current shareholders are likely to have unrealized losses. You’re looking for stocks whose shares are down for the year, or down from a major bout of buying in the not-too-distant past.
- There are 20 trading days left in 2020, including today. There’s enough time for those intending to take tax losses to wait another week or two for rallies to bring them better exit prices. If we don’t get any rallies, I’d expect more tax-loss selling later this month.
- If you do plan to take some tax losses, don’t wait too long. We all want to minimize our losses and many of us will wait until the last moment, hoping for higher exit prices. But if the investment isn’t likely to recover in the remainder of this year, you want to beat the crowd.
- Remember that it can take two to three days for trades to clear. If you think an investment in the red may recover somewhat and plan to hold longer before taking a tax loss, don’t wait for New Year’s Eve.
And here are some commodity-specific ideas:
- Uranium is up this year, but many uranium stocks are not. Absent another big surge in uranium prices in the remainder of this year, tax-loss selling by others could create great buying opportunities in the weeks ahead.
- Monetary metals are up this year, but some gold and silver stocks are not. This too could create buying opportunities—or serve as a warning. We must evaluate our stocks objectively. If they’re down, we have to ask ourselves if they still deserve to be in our portfolios.
- The same caution regarding stocks goes for copper and nickel (as well as zinc and iron), which are up this year. Also, remember that another wave of COVID-19 shutdowns would be bearish for industrial minerals.
- Oil stocks are down—but so is oil. At this point, the oil glut seems likely to persist, so I wouldn’t look to tax-loss selling as a source of buying opportunities in this space.
Please keep these ideas in mind as you formulate your own year-end strategy.
One more thing…
I don’t agree with the conclusion some analysts have advanced that this year’s tax-loss selling will necessarily be magnified by the wave of financings done last summer.
Yes, there was a lot of money raised. Yes, I’d expect some of the investors who bought last summer to sell their shares when they come free trading and hold to their warrants. But a lot of those investors are institutional investors who can read the money-printing writing on the wall. I think it’s far from certain that there will be as much selling as some are saying.
I also think it matters how well the companies that raised that money are doing. In my view, market action this fall has clearly demonstrated that most shareholders in the better stories are not willing to sell—not even with gold and silver down significantly.
Sure, companies that raised money on hype and hope alone will be more vulnerable to this potentially major source of selling. But I don’t think I have any like that in my portfolio—and I hope you don’t either.
As always, caveat emptor,
P.S. Note that this month is a quarterly update month for My Take. I’ll be sure to cover the tax loss vulnerability of each stock reviewed.