How to Know When to Sell a Stock

90% of investing talk is about what stocks to buy and when to buy them. It’s equally important to know when to sell and when not to sell. Let’s dive in!

When to Sell a Stock

New Facts - You research, find the company you like and buy the stock. Then, information comes out that changes your outlook on the company. I‘m not talking about overreactions and fear mongering in the news. Think of things that actually impact the results of the company. Here are a few examples.

- Enron hiding massive debts.
- Wells Fargo’s employees opening millions of unauthorized customer accounts.
- Volkswagen installing software to cheat emissions testing.

Things Get Bad: - A business can lose their competitive edge due to a weakening brand. An entire industry can become obsolete due to technological change. When earnings are declining and the business doesn’t show signs of recovery, it may be time to sell.

- JCPenny: fading brand.
- Blockbuster: unwillingness to adopt new technologies.

Life’s Needs - Whether it’s an emergency or planned expense, needing the money for something important is a good reason to sell. You invest for many reasons. Having cash available when you need it is one of those reasons.

Better Opportunities - There are times when you realize a company is not as good as you thought it was. It may not be. This isn’t an excuse to be impatient or to go with emotions.

- Arline stocks: Warren Buffett sold his stake in airline stocks after they were hit hard during the pandemic. He admitted he was wrong about the resilience of the airline industry.
- Snapchat: People believed it would be a disruption to social media. Then, Facebook and Instagram adopted Stories and YouTube adopted Shorts. Investors realized large tech companies had the ability to adopt new technologies before the new tech companies can make a splash in the industry. If you are caught in a situation like this, there is no problem with selling the company for better opportunities.

Resisting the Urge to Sell  

There will be times when you have the urge to sell. My itch to sell a stock comes after a strong surge and the stock becomes extremely overvalued (in my opinion). Even if I’m wrong and the stock continues to surge, I’m taking profits and you can’t go broke taking profits.

I’ve learned to add to that statement: “You can’t go broke taking profits, but you can lose out on long-term wealth by selling a great business.”

When a business is great, you can expect the stock to eventually trade at a premium. People don’t mind paying a higher price for luxury items. Sometimes luxury stocks aren’t much different. It is much better, and easier, to focus on the quality of the business and its earnings.

If the business is wonderful, keep the investment as long as you can. The longer you hold the stock the greater the opportunity to profit from the company’s competitive advantage.