5 Primary Reasons to Consider Selling or Trimming a Position

“…when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

—Warren Buffett, 1988 Berkshire Hathaway Shareholders Letter

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 buying and holding investments. Finding attractive buying opportunities in outstanding companies is difficult, so when I find them, I want to hold them for the long term. I no longer try to invest in companies that are potential winners—I now focus on companies that are already proven winners, with wide moats or exceptional qualities. However, no matter how great a business is, it is not static, and the prices in public markets will fluctuate. While markets may fluctuate in the short term, over the long term, they will follow the success of the business. It’s important to know the difference between being patient and being stubborn when things are not going as you expected.

There are several different circumstances and reasons for selling a position. Let’s start with the primary reasons for selling or trimming:

Reason 1: You Made a Mistake. Investing is based on probabilities, not certainties—something highly probable doesn’t necessarily happen. Investments might not work out for various reasons—it could be because of circumstances you could have not predicted, or it could be because of a mistake in analysis. Was it misfortune or a mistake?

Two of the most common investment mistakes are in calculating growth and true business quality.

• You Overestimated the Quality of the Business. After owning the stock, you realize the company is not as predictable, as special, or as wide-moat as you thought, and you now question the quality of the business.
• Growth Expectations Not Materializing. You expected strong growth, but the company is growing slower than anticipated. This might mean you overpaid for the stock, or that future returns won’t be as high as expected.

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. Buying shares to lower your average cost works if it is a high-quality company with growth, but it doesn’t work if it is the wrong investment, or you made a mistake. If you’ve made a mistake and buy more at a cheaper price, you’ll lower your average cost but increase your total loss if it continues to decline.

Reason 2: Competitive Advantages are Shrinking. Great companies can last a long time, but not forever. Sometimes there are great companies that get disrupted by new technology or competitors. It’s often hard to foresee whether a threat is imminent or inflated. For instance, newspapers, once dominant in their markets, were disrupted by the internet. Similarly, cable TV invested heavily in infrastructure, building moats in different markets, only to be disrupted by the rise of streaming services.

Reason 3: Better Opportunities. 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.

Reason 4: Valuation. Valuation is one of the most challenging aspects of investing because it lacks precision. When expectations are too high, reflected in elevated valuation multiples, holding a stock can feel risky—any adjustment in expectations could lead to a significant drop in price.

However, a stock with a high valuation multiple can maintain that premium for an extended period if it continues to execute well and is perceived as high-quality. Selling solely based on valuation can lead to “sellers’ remorse” as the stock continues to perform. On top of that, selling comes with costs, including capital gains taxes. Investing is about recognizing what makes a company special. You can water weeds all day, but if you don’t let your flowers—your winning investments—flourish, you risk cutting their potential short. Many sellers regret trimming too soon, only to watch those flowers continue to thrive.

Reason 5: Rebalance. 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.

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Perhaps there are other reasons why an investor may choose to sell their positions, but these are the primary factors I consider when making such decisions. As much knowledge, wisdom, and experience we gather to predict the future, it’s impossible for sure to know. We’re never going to be perfect, and mistakes are inevitable. However, these factors guide my decisions and help minimize regret.