Investment Knowledge: When is a Good Time to Sell a Stock?
A tricky question depending on your objectives
In a previous article, I shared my investment framework for identifying the right stock to buy and the right time to buy it. That article received a lot of engagement, so I decided to close the loop by explaining when it might be a good time to sell a stock.
If you are curious, you can find the original article here.
Identifying the right time to buy is hard. Sell too late, and you might miss out on the final gains. Sell too early, and you might leave most of your performance on the table. So, let’s explore when I believe it is the right time to sell a stock for a long-term investor.
Good reasons to sell
1. When your investment thesis is no longer valid
This is the number one reason to sell a stock. When you invest, you should have a clearly defined investment thesis: your reason for buying the stock. This could be based on factors like growth potential, improving margins, market share gains, or other specific metrics.
Your thesis acts as your anchor during market turmoil. If the stock price declines but your investment thesis remains intact, it might even be a good time to buy more.
The biggest mistake is trying to create new justifications to hold or buy more when the original thesis has clearly failed. This type of "averaging down" to rationalize losses rarely leads to good performance and can lock you into a losing position.
2. When the fundamentals are deteriorating
Declining revenue growth, shrinking margins, or worsening balance sheet metrics can signal fundamental issues. While these may sometimes be temporary, they can also indicate a long-term change in the company’s potential.
In this situation, it is crucial to reassess the stock’s potential by recalculating its Total Shareholder Return (TSR), the projected return. If the TSR is now too low after a deterioration in fundamentals, it might be time to sell.
For more guidance on calculating TSR, you can refer to detailed articles on this topic.
3. When you find better opportunities
Your portfolio should undergo continuous improvement to ensure you are holding the best possible investments at any given time. This means identifying stronger opportunities and reallocating capital when appropriate.
Think of it this way: if you were building your portfolio from scratch today, would the stock you’re considering selling still make the cut? If not, it may be time to move on.
However, avoid overtrading. Holding periods are a critical factor in achieving strong long-term performance, so make sure you’re not constantly shuffling your portfolio.
4. When the company shows red flags
Serious red flags such as fraud, legal issues, or repeated poor management decisions are warning signs that should not be ignored. History has shown that acting quickly in such cases often proves wise.
Even if the stock seems undervalued, red flags typically signal deeper problems that can harm long-term performance. When in doubt, it’s often safer to exit and allocate capital elsewhere.
Average reasons to sell
1. Portfolio rebalancing
Rebalancing your portfolio can be an important strategy to reduce overexposure to certain stocks, sectors, or geographies. It helps manage risk and ensures diversification.
However, rebalancing often requires selling your biggest winners, the stocks that have grown to dominate your portfolio. This can be counterproductive because winners often tend to keep winning. Before selling, consider whether the stock still has strong growth potential and whether trimming the position makes sense rather than exiting entirely.
2. Reaching your target value
Selling when a stock reaches your target price can feel like a natural decision to lock in gains. However, winners often continue to outperform beyond initial expectations. If the stock has positive momentum or strong fundamentals, selling your entire position might not be the best choice.
A better approach could be to sell a portion of your position to secure gains while leaving the rest to benefit from potential future growth.
3. Tax optimization
Selling stocks with negative performance to harvest tax losses (especially at the end of the year) can be a valid strategy. This allows you to offset gains elsewhere in your portfolio and reduce your tax liability. However, this approach depends on the specific context and your overall financial situation. Always evaluate whether this short-term move aligns with your long-term investment goals.
4. Valuation becomes unsustainably high
Even if the fundamentals remain strong, a stock’s valuation might become so inflated that future returns could be severely limited or negative. Selling in such cases can be prudent to protect gains.
However, selling at this point could result in lost potential returns, as the market may continue to rise.
Bad reasons to sell
1. Panicking or reacting to media noise
Panicking during market volatility or acting on sensationalized media or social media narratives is rarely a good reason to sell. Market sentiment shifts can create anxiety, but if the company’s fundamentals remain strong and its long-term outlook is unchanged, selling out of fear is often a mistake.
History provides plenty of examples where panic created opportunities for calm investors, such as the recoveries seen with Meta or Adyen. Staying disciplined and focusing on the business itself is key.
2. Selling after your first gain
When a stock that has been underperforming finally turns positive, it can be tempting to sell quickly to avoid any potential reversal. However, this approach may lead to missed opportunities, especially if the stock is regaining momentum.
Instead of focusing on short-term relief, evaluate the stock’s future potential and total shareholder return (TSR). Selling too early could mean leaving substantial gains on the table.
3. Losing patience
Investing often requires patience, as it can take years for an investment thesis to fully play out. Some of the best-performing stocks take time to deliver outsized gains, with one strong year sometimes making up for several years of flat performance.
Selling due to impatience often leads to regret, especially if you later buy back the stock at a higher price. Managing your emotions and using tools like technical analysis can help you optimize entry and exit points. However, long-term success often comes from staying the course with fundamentally sound investments.
Conclusion
Selling a stock is often more challenging than buying one, as it involves balancing the desire to secure gains with the risk of missing out on future growth. By focusing on good reasons to sell (such as a broken investment thesis, deteriorating fundamentals, or better opportunities) you can make informed decisions that align with your long-term goals.
At the same time, it is crucial to avoid selling for the wrong reasons, like reacting to panic or impatience, which can lead to regret and missed potential. Ultimately, successful investing requires discipline, patience, and a consistent framework for assessing both when to enter and exit positions.
Tell me what you think of that in the comments!
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A good reason also to sell a value, after studying the fundamental, is to plan its sale. This would drastically reduce all factors of influenceable external decision-making (media and others...)
Thank you for the article 🙏