Lesson 16: Knowing when to sell

Value investing 101

A lot of time is spent on buying stocks:

“Which stock should I buy?”

A logical question. But just as important is:

“When should I sell?”

The reasons to sell are fairly limited. For me, and Philip Fisher, there are only three.

But the answer is rarely simple. Just like with buying, psychology plays a major role. Emotions like hope, regret, and fear of missing out make it hard to decide when to sell. On top of that, when an investment is good, you ideally want to hold onto it for many years.

As Philip Fisher put it well:

“If the job has been correctly done when a common stock is purchased, the time to sell it is almost never.”

Still, there are clear situations where selling is the right call.

Three Legitimate Reasons to Sell

Fisher identifies three valid reasons to sell a stock. Let’s look at them one by one, with practical examples and key considerations.

1. You Made a Mistake

The first, and most important, reason to sell is: you were wrong about the stock.

That could mean:

• You overestimated the company;

• You misjudged the sector or the competitive position;

• You had overly optimistic expectations about profit growth or margins;

• You overvalued the management team.

The sooner you recognize the mistake, the better.

And above all: don’t confuse a price drop with a mistake.

Only when you see that the fundamentals no longer support your original investment thesis is it time to sell.

Don’t let your ego get in the way.

2. The Stock No Longer Belongs in Your Portfolio

Sometimes you didn’t make a mistake, but the company changes fundamentally over the years. A stock that once fit perfectly within your circle of competence turns out to be a different animal five years later.

Examples:

• Margins or cash flows are structurally weakening;

• Competition intensifies and forces price cuts;

• The company diversifies recklessly into unrelated sectors;

• The strategy becomes unclear, or management’s communication changes.

Even strong companies can deteriorate over time. That’s why it’s essential to review your portfolio critically at least once a year.

Too often, stocks are held for too long after such decline is already visible.

Buy & Hold = Buy & Verify.

Investing is an active verb; even after buying, you must continue to monitor your positions.

A good checklist remains your best friend.

3. You Find a Better Opportunity

You discover a stronger stock with more upside potential than anything currently in your portfolio, and you have no new capital available.

In that case, consider swapping out a less attractive position.

For example:

• You sell a stock with an expected return of 12%

• To invest in one offering 20% potential, and scoring better on quality

The new opportunity shouldn’t just be cheaper, but at least equal in terms of business model, management, balance sheet, and growth potential.

Three Common Wrong Reasons to Sell

Besides the three valid reasons, there are also many tempting but flawed motives to sell stocks. Below are the most common pitfalls:

❌ 1. Fear of a Correction

“The market is high — I’m selling now because a crash must be coming.”

No one knows when corrections will happen.

Those who sell consistently out of fear often miss the best days.

And if the company is still creating value, why sell?

Buffett rarely sells based on market sentiment. His focus is on business value, not market predictions.

❌ 2. The Stock is ‘Expensive’

What does expensive even mean? A P/E of 25? 35?

A good company with strong growth prospects will always appear optically expensive based on multiples. You should never view these in isolation; always in combination with sustainable growth, management quality, and competitive moat.

You must first assess:

• Is the valuation truly excessive?

• Or is it justified by high returns on capital and durable growth?

If the growth story is still intact, then expensive is sometimes just relative.

(Admittedly, it’s hard to say this in today’s market, because growth, especially sustainable growth, is often overestimated rather than underestimated.)

❌ 3. The Stock Has Risen Sharply

“It’s already doubled, so I’m selling.”

Why? Because it looks good on paper?

A price increase is not a reason to sell, not if the company is fundamentally even stronger than before.

For example:
I bought Lotus Bakeries at €500 and sold a year later with a >40% gain. I was pleased at the time.
Today? The price is €9,100. The stock has never been cheap enough again to buy back.

Discipline Over Emotion

Selling is hard. It requires emotional control, clear thinking, and the courage to admit when you were wrong. But just as you analyze a company thoroughly before buying, you should do the same before selling.

And don’t be afraid to let go of mistakes. That only makes you stronger for the next round.