Investing can be reduced to three major actions: buying, holding and selling. Much is written about the decision-making process that should go into purchasing companies (stocks), but much less is said about holding or selling.
It has been said that people don’t always make money with the investments they make, and they don’t always make money when they sell a stock — it is in the holding of a stock that leads to appreciation.
Instead of constantly moving in and out of investments, I prefer to buy and hold. Attractive opportunities in outstanding companies are rare, so when I find them, I hold them long term. I no longer chase potential winners — I focus on proven winners, with wide moats or exceptional qualities. But no matter how great a business is, it’s not static and public market prices will fluctuate. While markets move in the short term, they follow business success over time. The key is knowing when patience becomes stubbornness.
Here are five primary reasons I would consider selling or trimming a position:
- You made a mistake. Investing is about probabilities, not certainties. Sometimes an investment doesn’t work out due to unforeseen circumstances — or simply because you got it wrong. Two common mistakes are:
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- Overestimating business quality – After owning the company, you realize it’s less predictable or less special than you thought.
- Disappointing growth – You expected strong performance, but results have lagged. This may mean you overpaid or the upside isn’t there.
If growth doesn’t materialize, or if the business is not as high-quality as believed, and the stock declines and you find yourself in a hole, then stop digging.
2. Shrinking competitive advantages. Even great companies can lose their edge. Technology, new competitors or changing consumer behavior can all disrupt once-dominant players. Newspapers were displaced by digital news; cable TV was upended by streaming. When a moat begins to erode, it may be time to exit.
3. A better opportunity. Sometimes there’s nothing particularly wrong at all with a company or its stock; there is simply a much better opportunity that you would rather invest in.
4. Valuation. Valuation is among the challenging aspects of investing. A company can carry a premium for years if it consistently performs. But when expectations become overly optimistic, the downside risk grows. Investing is also about recognizing what makes a company special. Selling purely on valuation can backfire if the stock keeps climbing, but ignoring extreme overvaluation can also be costly. It’s a balancing act, especially with capital gains taxes and missed upside at stake.
5. Rebalancing. Some investors may like to rebalance when a position has had a meteoric rise and becomes too big for your comfort; others may want their “winners” to be a bigger part of their portfolio.
As much knowledge, wisdom and experience we gather to predict the future, it’s impossible to know for sure. We’re never going to be perfect, and mistakes are inevitable. ●
Umberto P. Fedeli is President & CEO of The Fedeli Group
