Don t let your natural disdain for paying taxes overcome your evaluation of the merits of continuing to hold a stock. Some investors hold on to stocks with mediocre prospects because they do not want to sell and incur taxes on any gains. All too often, these are stocks that have already soared in value. But refusing to sell, and watching as the stock does nothing or takes a nosedive, could result in a lower return that more than offsets any taxes that would have been paid. Don t buy a stock because it recently had a substantial drop in price.
Some investors assume that lower prices translate into bargains.
Most big price drops are the result of changing circumstances at the firm. Make sure you know why a price drop has occurred before jumping to conclusions about undervaluation. Don t buy a stock solely because you like the product the firm makes. The product may be great but the firm may not. For instance, the product could be successful but comprise only a small portion of firm sales.