Introduction

I’m going to start this article with the same opening statement that I utilized in two previous articles I wrote on knowing when to sell a stock. The most common complaint that I have heard from investors over my 49+ years in the financial services industry is as follows: “Everyone wants to tell me what to buy and when, but no one ever tells me when to sell.” Consequently, it seems to me that whether you are a novice investor or a grizzled old veteran, the decision as to when to sell a stock is considered one of the most difficult decisions investors must make.

Therefore, not only do I consider this a legitimate complaint, I also consider it an extremely important investing principle that investors constantly face and must deal with. Knowing when it’s the appropriate time to sell a stock can be a very challenging task. But perhaps most importantly, the prudent investor must simultaneously recognize and accept that it can rarely, if ever, be done with perfect precision. In other words, as another old saying goes: “they do not ring a bell at market tops or bottoms on Wall Street.” Consequently, we are prudent when we accept that the best that an investor can expect to accomplish is to make sound and rational sell decisions.

However, before I go any farther, I want to clarify my position. This article on when to sell a stock is based on how I believe a rational prudent long-term investor might consider behaving. In other words, this article may not be of value to active traders or speculators. Personally, my investment philosophy is based on the long-term ownership of attractive businesses that I want to be a long-term shareholder partner of. Consequently, I have little or no experience that might be of value to the more active trader or speculator. Therefore, I also have little knowledge about how that type of individual might or should rationally behave. For that reason, I will offer no comments or advice on short-term trading which is something that I know very little about.

When To Sell a Stock?

I have long held that equity investors are faced with the challenge of correctly answering three important questions:

  1. What to invest in? I believe the individual security selection is vital to long-term success.
  2. When to invest? I believe you must not pay too much for even the best companies.
  3. When to sell? Even the best choices can, from time to time, become dangerously overvalued or experience a permanent deterioration of their fundamentals.

I have written extensively in the past about correctly answering the first two questions. However, I must admit to being somewhat negligent regarding answering the important question, number 3. Part of my negligence stems from the fact that I tend to agree with legendary investor Philip Fisher and what he wrote in his great book “Common Stocks and Uncommon Profits.” In chapter 6 in his book, (which I enthusiastically endorse to anyone who has money invested in common stocks), was simply titled: When to Sell and When Not To. I quote the last sentence of chapter 6 as follows: “If the job has been correctly done when a common stock is purchased, the time to sell it is-almost never.”