Long-term Loss

QI

recently read that shares of Cisco Systems have still not recovered from their drop when the dot-com bubble burst in 2000. Is that true? And if it is, how can I avoid investing in a company like that? — P.T., Paramus, New Jersey

A

First off, understand that Cisco Systems isn’t necessarily a bad company or bad investment. The problem was the bubble — people continued to buy shares of increasingly overpriced stocks, sending their prices up further, until the bubble burst. While many of those companies flamed out, others were solid and kept growing. It is indeed true that, 20 years later, Cisco’s market value remains lower than it was before the bubble burst. That’s true of other solid companies, too, such as Intel. It took Microsoft and Oracle much more than a decade to surpass their pre-crash highs. To avoid ending up with a loss that won’t be overcome for 20 years, pay attention to valuation when you buy a stock. You should buy high-quality companies, but not at any price. Aim to buy stocks that seem undervalued — perhaps with their price-to-earnings (P/E) ratios significantly lower than their five-year average P/Es, or with price-to-sales ratios significantly lower than those of their peers. You can also ask yourself whether their market value seems reasonable. QWhat are capital gains? — L.D., Eugene, Oregon A If you own and sell an asset such as a stock, the increase in value over the purchase price is your capital gain. If you sell for a loss, you’ve got a capital loss. Your gain or loss on an investment before you sell it is an “unrealized,” or “paper,” gain or loss. Want more information about stocks? Send us an email to foolnews@fool.com.