Mark Lister, 11 December 2019

I often get asked “when should I sell a stock?” It's understandable many investors grapple with this. The decision to sell is much harder than the one to buy, and there’s no easy answer to this question.

When a stock has performed badly, selling means turning a paper loss into a real one. More importantly, it means admitting you were wrong.

This is difficult for many of us, and our egos don’t like it. Many an analyst or fund manager have doubled-down on their positive view of a company in the face of an underperforming investment.

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They convince themselves the market doesn’t understand, that they are the only one who gets it, and that the stock in question must be an even better buy than it was before.

Sometimes that’s the case, but mostly it’s not. Knowing when to admit your original investment thesis was flawed or that you simply got something wrong is tough to do, and it takes a fair amount of humility.

It is, however, one of the more under-appreciated skills in investing.

Think carefully about the reasons you originally bought the stock in question. Do they still hold true, and would you buy it again today if you weren’t stuck with it already? If the answer is no, it might be time to bite the bullet and cut your losses.

It’s not just the poor performers which cause us grief about whether to bail or not. When stocks have performed well, the temptation to sell is often greater and the decision to do so even more challenging.

Investors lucky enough to own some of our best businesses will have found themselves in this position. If you’re a long-term holder of Auckland Airport, Mainfreight, Port of Tauranga or Ryman Healthcare, you’ll be sitting on substantial gains. You can add a2 Milk and Xero to that list in recent years.

These stocks have all done phenomenally well, so does that mean you should sell them? Maybe, but not necessarily. A high valuation isn’t at the top of my “reasons to sell” list. Poor governance, an unsustainable business model, excessive debt, or rising competitive threats are some of the things that rank higher.

Another factor to consider is what other ideas you have for the money. At the moment bonds, property and many other shares are probably looking equally pricey.

Maybe you’re planning to sit on the side-lines in cash, waiting for the inevitable downturn to buy back in. Good in theory, but that means you’ve got to get your market timing right twice. Once to pick the top to get out, and then again near the bottom to get back in.

Selling is much harder than buying, but sometimes we need to acknowledge we got something wrong and take a loss on the chin.

However, if you still believe in a company and its future, there are only a few reasons to sell. Needing the money is one, while having a superior opportunity is another.

If it’s nothing more than nervousness about the high share price, maybe rebalancing your position is a sensible compromise. That means selling a part of your holding to take advantage of the strong performance but keeping some skin in the game for the longer-term.