Determining when to sell your stocks as a value investor. 

Unlike traders who follow charts to make buy and sell decisions, value investors, after buying shares, seldom sell in the short-term.

This is especially true for those following quality investing; they invest in great and sustainable businesses for the long run to let compounding do its magic, and hardly sell their shares as it is not easy to find another quality stock to replace it for the long haul.

One of the biggest mistakes or wrong reason to sell a stock is boredom. Don’t be a bumble bee buzzing around from one position to the next. However, what is bought must eventually be sold.

Those people relying on charts use technical signals to make market timing on selling. Some of these signals include a loss of momentum, reaching an overbought state basing on relative strength indicator, or suffering a breakdown on the stock chart. Price targets are set based on price ceilings that the market has defined in the past. However, few chartists have been successful in consistently selling at the right timing following those technical sell signals.

For value investors, buying a stock at the right price is vital, as your return depends on the price you pay. However, without selling, your gain is only a number and you won’t realize the “real” profits. In fact, for most stocks, if you don’t sell at the appropriate time, the benefits of proper buying disappear.

There are a few good reasons to sell a stock.

Consideration #1. Good Profit

A stock should be sold to realize profit if the share price has risen rapidly above its perceived intrinsic value. This is especially true for cyclical stocks which have risen too much in price during their up cycles. If we don’t sell at their high prices, we may not see the profit later when the down cycle comes as the good time may not be sustainable. The question is, by how much above? For this, I will present my opinion in a coming article.

Consideration #2. Undoing Mistakes

A stock should also be sold if we discover that we have made a serious mistake in our investment thesis for the stock. We have discovered some cockroaches hiding in the closet. We sell even though we have made a loss in the stock.

Consideration #3. Something Has Changed

We should also sell the stock if later, there is a fundamental change for the worse of the business, something we did not see or anticipated in our previous analysis. In other words, the story has changed. This doesn’t mean we should sell the stock due to the drop of its stock price or reduced company’s earnings in a quarter or two, whereas the long-term fundamentals have not changed.

Consideration #4. Questionable Values or Incompetence

I often sell a stock when I sense signs of management incompetence or unethical and untrustworthy behavior. Honesty and credibility of the management is very important, for if they are not, not matter how good is the business and how much the company will earn, as a minority shareholder, they won’t share the fruits of success of the company with us.

Consideration #5. Better Alternatives

As a retail investor, our investment capitals are limited. If we have found a better stock which may provide better return, we may have to sell the existing stock for some proceeds to invest in the better stock with better future. It is the opportunity cost we are weighing on.

Consideration #6. Re-Balancing

In a bull market when stock price goes up a lot and we find that we now have too many stocks in our asset class, we may need to sell some stocks to re-balance our asset allocation as a good practice.

Consideration #7. You Need The Money

Of course, sometimes we may need money such as starting a business or buying a home, hopefully not for an expensive holiday overseas, we may have to sell the stocks we have.

 

 

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What other considerations are there when you decide to sell your stocks?