The decision to buy a stock is difficult and challenging, even for renowned investors, but the decision to sell is even more intense. I have wrestled with these decisions many times. While not every decision is optimal, the goal is to make better than fifty percent good decisions. That may sound modest, but it is the reality of the equity markets. Buying and selling are gut wrenching decisions for EVERYONE.
Some people believe that they can regularly and consistently get in and out of the market with gains. Experienced investors know that such a proposition is difficult, at best. Realistically, that thought pattern is pure fantasy.
Buffett often says that his holding period is forever. Why is this? The reason he says this is because he focuses on the fundamentals of companies. His goal is pick strong, well-managed companies with steady earnings prospects. If the fundamentals are solid and he owns it at a significant discount to its value, there is no reason to sell. Should the fundamentals erode, he USES the market to purge the stock from his portfolio, because even poor fundamental performers can rise in a rising market. The main point is that good security selection in the purchase process is essential. “If you pick the right horse in the beginning, there is no need to switch horses.”
Therefore, the decision to sell should be based upon the performance (fundamental not market performance) of the company since it was purchased. A high market is often a good time to move on if the purchase isn’t meeting long-term expectations.
To sell and hope to buy it back at a lower price requires two difficult decisions – when to sell and when to buy. The more of these decisions an investor makes, the higher probability of that success will not be achieved.
In simple terms, if the fundamentals are not working out for an extended period of time, the market is high, and the stock price is high, it is a great time to make that sale. Don’t fantasize that a miraculous turnaround will happen with their fundamentals and try to hold out for a higher price. Usually, the fantasy doesn’t happen. Next thing, you’re selling out at even lower prices.
Munger always warned Buffett when Buffett put off decisions to “stop thumb sucking” and make the move once the decision has been made.
Selling equities successfully is one of the hardest things to do. Don’t fool yourself!
