Scaling Out and Reasons to Sell

Why this matters

Most investing advice is about what to buy. Far less is said about when to sell, even though every investment you own will eventually be sold, whether by you on purpose, by you in a panic, or by your heirs. A clear set of reasons to sell, decided before you need them, is one of the best protections against selling at the worst moment.

Good reasons to sell

• The thesis is broken. One of your thesis breakers has happened: the advantage is gone, the key customer left, the debt has become dangerous. The reason you bought no longer holds.
• The price is well above your estimate of value. If a stock rises far past even your optimistic case, the future returns from owning it may be poor, however good the business.
• There's a clearly better use for the money. Every dollar in one investment is a dollar not in another. That's opportunity cost. Selling a fairly valued holding to buy one with a much larger margin of safety can be reasonable.
• The position has grown too big. A winner can come to dominate a portfolio. Trimming it back within your sizing limits is risk management, not a prediction.
• You need the money. The goal arrived: the house, the tuition, retirement. That's the whole point of investing, and as a goal approaches, money is usually moved toward safer assets well before the date.

Common bad reasons

• "It went down." A falling price with an unchanged business may mean the investment is now better value, not worse. The last lesson's question applies: would you buy it today?
• "It went up, so I should lock in the gain." Selling a rising investment only because it rose can mean selling your best holdings early and keeping your worst. The decision should depend on value, not on your gain.
• "I'll sell when I get back to even." Your purchase price is a sunk cost. The market doesn't know or care what you paid.
• Boredom or headlines. A quiet stock isn't a broken one, and a scary headline isn't always news about the business.