Stock Investing: When to Sell

So you've got a portfolio now. You have 1 stock in it or 50 stocks in it. You're doing okay, not as well as you'd hoped, which is natural and normal. This is a long long ride, as I've said. There a likely some up and some down overall among your holdings. When do you sell one?

It's very simple, very straightforward, and easier to know when to sell than it is to choose to purchase a particular stock. You'll still get it "wrong," of course-- either selling near a bottom or selling too soon or too late or whatever. Nothing you can do about that without a crystal ball to know the future. Let it go. You can only operate on the information currently available.

Markets rise, markets fall-- but overall they rise. Never sell on market movements, you won't know when it's time to buy back in and you'll miss the rebound.

There are only 4 reasons to ever sell a stock you own.

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1: Thesis Wrong/Thesis Changed: the reason you bought that stock in the first place-- your thesis-- has changed, or was incorrect in the first place. So say you bought because you thought the new product line was going to a be a sensational hit, and it turns out to be a dud. Or you loved the CEO's track record and now she's leaving the company. Or you thought they had a wide competitive moat, no real competitors, and months later some other company is rapidly taking market share from yours. Whatever: if you check what's happening with the company you own and something substantial has changed since you bought, and it worries you, that's a good reason to get out.

2: Rebalancing: your stock has risen so much that it's now a big percentage of your entire stock portfolio. Imagine you started with 10 stocks of more or less equal dollar weight, so each held about 10%. But now months or years later one company is worth substantially more, and holds close to 40% of the portfolio by dollars. Yes, it's a good problem to have. But if you're managing risk, you'll be worried that that one company could run into trouble, causing its stock to fall and making a lot of your paper profit disappear. Rebalancing means selling that company down to be more level with the average dollar size of the rest of your holdings, thereby minimizing the risk overall. I hate to bail on clear winners, but sometimes there's just too much unintended exposure on one stock. Gotta do it.

Common mid-life crisis solution

3. Better Place for the Money: Obviously it's always better to let a winner ride; that is, let a rising stock keep rising, theoretically forever. You sell it and you will make nothing on any coming rises in valuation, no matter what that company does in the future, and you'll have a capital gains tax to pay on your stock's appreciation since purchase. (You'll pay even more if you held it less than 12 months, as that gain is now classified as regular income). But sometimes you just have to sell: Maybe you found another company you like, and you need capital with which to buy it. Or perhaps your eldest child is ready for college and needs tuition. Maybe you want to reward yourself with a trip, or a new car or boat (depreciating assets = BAD). Whatever the need, that's what you invest for: to make a little money into a lot more money. Just do it is as infrequently as possible and plan for the tax hit. (Sophisticated investors will calculate the tax into the purchase price of the thing they need the money for, and then choose based on the combined cost.)

4. Need the tax loss: Finally it may be that you have a substantial tax you wish to offset by claiming a loss on your investment. If you have a stock that's declined since your purchase, even if your thesis is still solid and you believe in the company's future success, sometimes the loss is helpful from a tax perspective so you dump it. You can always buy it again later (wait 30 days!), and maybe at a better price than the first time.

That's it. I would never sell with the idea that the company has reached my desired valuation, a common reason. That sounds to me like unnecessary churn, exposing you to higher trading costs and the possibility of missing out on a great run by a company you've already vetted and enjoyed.

If I'm thinking of selling and my reason can't be squared with one of those above, I hold.

Drifting to Fifty | Random unrelated nugget of the week
An asset is something that is worth more than you paid, or which puts money in your pocket every year: a rising stock, treasury bills, fine art, long-held real estate. A liability takes money out of your pocket every year. Which one is your car? Exactly. What about your house? Hmmm...