When to Sell Stocks Won’t Be Easier Than Buying
In terms of investment practice, if you are a believer in long-termism, there is almost no chance to sell your holdings, and it can easily become an excuse to avoid selling decisions. This is what I have repeatedly said is the final reward for investors. In fact, the judgment at the moment of your initial purchase has already been decided.
In such a predicament, it is difficult to have any possibility of error correction; because it is easy for you to use long-termism to cover up the poor investment performance.
To sum up, the problems of different investors are different. The problem of most non-professional investments is that they do not have too many resources, no professional guidance, and too little time. In addition to the psychological reasons mentioned above, the result is that trading operations are too frequent , so that the remuneration disappears in these unnecessary transaction activities. Because of this, it may be relatively correct for ordinary retail investors to switch to long-termism and insist on only holding a few companies that they are sure of.
Relavent content in my book
In my book “The Rules of Super Growth Stocks Investing“, I have discussed when to sell stocks:
- Section 5-4, pp. 371-378, “Consider selling when 4 situations occur”, entire subsection
Four situations of selling stocks
- The development of the company has deteriorated and is difficult to recover: the current operating conditions or prospects of the company have deteriorated significantly from when you bought the stock, and there is no possibility of improvement in the foreseeable future.
- Admit that you made a mistake in your original judgment: admit that you were wrong at the beginning, and you made a wrong analysis when you bought. You must admit your mistake and sell, and it is a wise choice to admit your mistake and stop the loss.
- There are other better investment opportunities: After rigorous and careful opportunity cost evaluation, when it is determined that another investment target option can obtain better returns, then you can indeed choose to sell and invest funds in stocks with higher expected returns.
- The growth rate of the company is lower than the “inflation rate + yield rate”: If the company is in this situation for a long time, investors must question the necessity of the company’s existence, and it is difficult to persuade investors to hold the stocks of the company.
The first 3 items mentioned above are derived from Philip Fisher in his famous book “Common Stocks and Uncommon Profits”, item 4 is the principle I personally adopt. Buffett also mentioned a similar view in his 1981 shareholder letter: “If a company only earns 8% or 10%, it is not enough to use it for expansion, debt repayment, or real dividends. Inflation is a parasitic The worms have already cleared the dishes.”
Howard Marks’s view
Howard Marks has mentioned his views on selling in many chapters in his classic investment book “The Most Important Thing”.
Quotes from Howard Marks
The reason to sell should be based on investment prospects, which must be judged by solid financial analysis and discipline, not on investor psychology.
When you find an investment with long-term compounding potential, the most difficult thing is to be patient and how to be safe in terms of expected return and risk. Investors are easily swayed by news, sentiment, and the fact that they have made a lot of money so far, or a new idea that seems more promising.
The average people’s view
According to Marks, the average investor tends to sell stocks for two reasons:
- The first is because of the rise, people like profits, worry about losses, and want to keep the profits to avoid regret.
- The other is because of the decline, which makes people feel that there is something wrong with the company, and they are afraid of continuous decline.
Of these two selling mentalities, the latter is the reason for the former. Because they have experienced turning profits into losses, they are dominated by the emotion of “fear of regret” and easily sell positions with floating profits; the former is also the reason for the latter. If you lose a position, you will have a loss-making position in your hands, and the psychological pressure will be greater, making it easier to sell a loss-making position.
As a result, most investors are caught in frequent short-term operations, selling low and buying high.
Sell in two situations
According to Marks, selling is not a stand-alone decision and cites two scenarios for selling:
- If your investment thesis appears to be less valid than it once was, or the likelihood of proving accurate has decreased, it may be appropriate to sell some or all of your shares.
- Likewise, it would be reasonable to reduce or liquidate an existing holding if another investment that appears to be more promising offers a higher risk-adjusted expected return.
The first point includes two possibilities:
- Possibility 1: The company has changed, and the original reason for holding is not valid.
- Possibility 2: Your judgment has not been verified by the actual operation of the company.
Because the investment itself is a prediction of the company’s future, these two possibilities are actually one: the investor made a mistake.
The most important reminder
Market crash is not a reason to sell stocks.
Related articles
- “When to Sell Stocks“
- “Investors who chase for touted stocks“
- “Retail investors’ wrong investment concept not worth trying at all“
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