When to sell a stock

Being a long-term investor means carefully selecting great companies with promising futures and keeping for at least your minimum holding period. You do, however, need to know when to sell.

When doing your initial research before deciding to invest in a company, you will start to build a list of reasons for putting your hard-earned cash towards it (keeping an investment journal is a great way of jotting down your thoughts). That should help to build up a story, a narrative, to follow over time.

Here’s a list of good reasons for choosing to sell a stock:

  1. Your thesis has changed: you not longer believe in the company; the ‘story’ is no longer what you bought into.
  2. Overexposure on a particular position in your portfolio: not feeling comfortable with how large a percentage a single stock now represents. If it’s worrying you enough to cause sleepless nights.
  3. Trimming your portfolio in order to pay for a life event. We’d recommend doing this proportionally (trim to keep the percentages the same).

Overreacting to news regarding a company, without fully understanding it first, is a bad reason to sell a stock. As a long-term investor, you need to take the long view. If it doesn’t affect the fundamentals, don’t worry!

Charlie Munger once said “the first rule of compounding: never interrupt it unnecessarily”. If you can find a high-quality business that can compound its earnings over time, simply committing to hold for at least 3-5 years will minimise the temptation to sell for short term profits – selling too soon may mean losing out on much larger gains in the long run.

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