While the concept of “bag holding” isn’t exactly new, the term has been frequently used by today’s retail investors. Let’s learn more about what exactly bag holding is and how to avoid becoming one.
Definition and Example of a Bag Holder
A bag holder in investing is someone who holds a stock as its value declines. The term originates from the concept of being “left holding the bag,” meaning left responsible for something because others have abandoned responsibility. For an example of a bag holder, you can look to any company that once seemed like a good investment but has since plummeted in value. Take Sears, for example. It was once a popular department store, with stock that was trading above $125 for the first half of 2007. Fast-forward to 2022, and Sears’s outlook is much bleeker. The company filed for bankruptcy in 2018, and while it didn’t go out of business, its stock has not recovered. Its stock opened at just $0.02 on the first trading day of 2022. It’s clear that Sears’s stock price lost substantial value, and anyone still holding the stock today after buying it near its peak could be considered a bag holder.
How Does Bag Holding Work?
Bag holding occurs when an investor holds a stock as it declines in value and incurs losses rather than selling it off. Suppose the stock has reached $10 per share, which is just 20% of the stock price when you bought it. If you sold the stock for a considerable loss, say at $10 per share or just 20% of the stock price, or if the stock’s price rebounded, you would not be considered a bag holder. The prospect of becoming a bag holder may be more likely for a value investor, meaning someone who seeks out stocks they believe are underpriced. Value investors buy companies that may not be performing well in the market, but that they believe will rebound in value. And while this type of investing can often pay off, that’s not always the case. Instead, it may simply be the case that your projections were wrong, and the stock price slowly falls.
Bag Holding vs. Volatility
It’s important to make the distinction between bag holding and simply experiencing everyday stock market volatility. When someone is a bag holder, they’ve held a stock far longer than they probably should have, and it’s drastically declined in value in that time. Not everyone who sees their stock holdings lose value would be considered a bag holder. Consider someone who bought Tesla stock in November when the price reached its peak of $1,229.91. Just over a month later, the stock price fell to $899.94, meaning it lost more than a quarter of its value. And while Tesla investors did see their shares decline in value, this was more an example of the type of volatility that’s completely normal in the stock market, not bag holding. After all, by early 2022, Tesla’s stock rebounded to trade at more than $1,000 per share once again.
What It Means for Individual Investors
One of the risks of investing in the stock market is the risk that a company’s shares will decline in value, or even become worthless. No one can truly predict the future and say with certainty which companies will succeed and which will fail. Perhaps one reason why investors end up “holding the bag” is that one piece of common investment advice is to buy low and sell high. However, that advice refers more to day-to-day stock market volatility than it does to failing companies. After all, selling at a loss is better than holding a stock until it becomes worthless.
