Advice about buying stocks is everywhere. But I reckon a decent strategy for selling is perhaps even more important than choosing stocks to buy.
And the selling side of the investment process has challenged me over the years. Sometimes I’ve sold too soon. Other times I’ve sold too late. And many times I’ve sold for all the wrong reasons.
But two super-investors with impressive performance records have offered insights on the important subject of selling. Peter Lynch, for example, delivered a top performance running Fidelity’s Magellan fund between 1977 and 1990. And since then, he’s mentored “virtually every” equity analyst at Fidelity.
Selling stocks like Lynch
Lynch reckons the best time to sell a stock is when the business has no further room to grow. So, typically, he buys into a growth ‘story’, meaning a stock representing a business with growth potential. But he emphasises the need to understand when a company is getting close to maturity. When that happens, he reckons it’s time to sell.
But it can be psychologically difficult to sell a stock when everything in the business is going gangbusters. However, Lynch’s approach chimes with an old saying used in general life — to quit while things are going well.
For example, it’s satisfying to see a top-performing athlete retiring at the top of their game, leaving on a high. The alternative is to wind things up when a decline sets in. And that scenario can be deflating, and perhaps costly when it comes to stocks.
Lynch also reckons it’s time to sell a stock if the story deteriorates. So if the growth potential in a business turns out to fall short of previous expectations, he likely sells. But as I see it, that could mean taking lower profits than anticipated, or selling a stock for a loss.
When Warren Buffett sells
According to Matthew Frankel over on our US site Fool.com, super-investor Warren Buffett addressed the when-to-sell question at Berkshire Hathaway‘s 2002 shareholder meeting. And the most usual reasons for a Buffett sell are deteriorating fundamentals in the underlying business, or a changing competitive landscape.
I think Buffett’s sale of Tesco a few years ago is a good example. At the time, he said he’s lost confidence in the management team. So he cut his losses and moved on. Then, last year, he dumped all his airline stocks when the pandemic hit the world. That looks like a case of massive change in the fundamentals of the underlying businesses.
But Buffett also said he’d sell a stock if he needed the money to invest in something better. And I think that reason’s worth pursuing. After all, I’m almost always busy researching stock opportunities. So why should I remain out of a great stock just because I happen to be fully invested?
Aficionados of Buffett’s career will find plenty of examples of him selling one stock to buy another. And I think it’s a possible route towards increasing the overall quality of my portfolio. Although nothing’s guaranteed and I could end up replacing a good stock with something poorer if I’m not careful. And I won’t do it often, in case of slipping into over-trading.
