I briefly addressed the issue of “when to sell” in my annual investor letter. Here I will give more detail on how I think about this issue.
While a lot of attention is devoted to the process of buying stocks, selling is a bit neglected. Some common questions that we deal with - Do you sell when the stock has hit your ‘target price’? What if the stock price has not moved for 2 years? What if the stock has moved up too fast? What about that stock that I did not buy because I must sell what I own…?
A big part of this conundrum is that there is no end date to a company or its stock market existence (except in special situations). While you may have a ‘target price’, the stock itself does not have any target price. It will continue to exist after reaching the ‘target price’, it may even reach new heights in the future. Another major distraction is the existence of many other stocks in the market. While it is a boon to have a vibrant stock market with plenty of listed companies, it can also be painful to see other stocks racing past your holdings! It is very likely that your stock is not the hottest thing in town and makes you question its presence in the portfolio.
There is no perfect way to decide when to sell or at least I have not found one yet. To make my life easier, I have come up with some criteria to aid my selling decisions:
Corporate governance lapses – This is a red flag event, and I would sell immediately regardless of price and loss. Examples are irregularities in accounting, promoters indulging in fraudulent insider trading, etc.
Thesis not playing out – If the company has not performed as per my expectations for a reasonable period (say 2 – 3 years), it is time to move on to something else.
Too pricey combined with other opportunities – While I am reluctant to sell a stock simply because it has become too pricey relative to its value, if there was another long term compelling opportunity, I would strongly consider selling / partly selling the pricey stock to fund my purchase.
Once again, there really is not a perfect way to do this, but the above parameters help me in my decision making. It also fits well with my ‘buying for the long term’ philosophy. By setting the bar high for selling, I can hold on to my investments for longer. It goes without saying I also set the bar high for buying!
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