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I own some stock that lost more than half its value. It has now been more or less stable for months, and I'm tempted to get rid of it because I see poor prospects in the future for this line of business.

However, I'm told by others that this is unwise, that this is the worst time to sell -- I should recover the losses!

Isn't this the gambler's fallacy? What stops the stock from going down by another half in the future, again? And again?

The people giving me this advice have no insight at all into this particular stock nor have a particular keen insight into economics in general. However, they present this as if it is obvious fact that everyone should know, that if you have experienced this, then you should wait until it has regained at least some of its value.

What basis would anyone have for this statement? Is it true that statistically, more often than not, a company will recover?

The way I view this, is if I would rather buy or sell stock in the company now. What happened in the past is simply unfortunate (for me), it by itself doesn't have any bearing on the future for this company.

This might be closer to the sunk cost fallacy with a bit of loss aversion thrown in. I know it is hard emotionally to "lock in your losses", but that money is gone and it is a new day. You have an asset that is worth what the stock trades at today and that's what you have to work with.

It is very possible that stock might regain its previous losses, but the fact that you paid more for it doesn't make it any more/less likely to than any other stock.

The key is that you have to pretend that you have the cash value of the stock today and never invested it. If you would buy that stock today, keep it. If you wouldn't trade the same amount of cash for the stock, try something else.

(1) Assets held in stocks for many years (regardless of their "paper" value at any given moment, like now) are a way to protect them from taxation for those years. Unlike bank accounts, mutual funds, real estate, income-generating assets, etc, stocks incur NO taxes AT ALL during those held years-- it's a 100% taxation shelter for that time. So if there is any chance at all that your stock will recover, hold onto it.

(2) Another reason to hold and not get rid of a stock is that if/when it does recover and you sell profitably, if you sell more than 18 months after acquisition, you pay long-term capital gains tax rate, which is less than short-term capital gains tax rate, and way less than wage/salary/interest/dividend income taxes.

(2) Losses on stock are NOT valueless- in the USA, when you sell at a loss, you can write-off those losses against income that year* (gains made in other stock transactions, or in your salary) when you file your taxes, which will lower your taxable income and possibly even move you into a lower tax bracket (further reducing your taxes). *there are limits to how much you can do this, but you can carry-forward excesses beyond this limit into many future years, saving you taxes in those future years.

The more money you've lost, the greater the benefit.

Carefully timing your sales-at-a-loss can thus be beneficial to your taxes on a given year. Rich people do this all the time-- selling losses in the same year as they make a big gain in some other transaction. Lots of tech stock option recipients used this trick to extract at least some value out of worthless ESPP/ESOP stock.