Long-term investors’ sell decisions are primarily based on reaching fair value, capturing better opportunities, and changes in investment themes.
Emotional biases and cognitive errors can hinder rational sell decisions.
To overcome emotional bias at fair value attainment, methods such as quantifying qualitative judgments, the blank slate test, maintaining terminal inputs, regularly reviewing business characteristics, partial selling, and setting a fair value range are recommended.
For changes in investment themes, documenting preliminary sell reasons, detecting warning signs, and applying Philip Fisher’s three-year rule can help prevent attachment to outdated investment theses.
Although regret is inevitable after selling, lessons from past decisions can improve future decision-making.
Selling is a portfolio and risk management tool, and decisions should be based on clear, emotion-free rationale.
Opinion
Investors are prone to letting emotions dictate the timing of their sell decisions. They tend to hold onto winning investments while hesitating to sell losing ones, hoping for a recovery. Overcoming these emotional biases requires quantitative analysis and the exclusion of emotions.
Furthermore, investors must be sensitive to changes within companies. If the original investment thesis no longer holds, one should be willing to cut losses decisively. Setting sell conditions at the outset of an investment, paying close attention to warning signals, and considering a sell if the expected performance is not achieved within a set period are strategies that can be beneficial.
There is no need to overly worry about post-sale price fluctuations. Regret can be transformed into an opportunity for growth, and the lessons learned can strengthen future investment decisions. Above all, believing in the intrinsic value of high-quality companies and exercising patience is key to long-term investment success.
Core Sell Point
When there is a clear reason—such as reaching fair value or a change in investment rationale—sell stocks based on rational, emotion-free decisions, while maintaining a long-term, patient approach for high-quality companies.
When and How Should You Decide to Sell Stocks?
Long-term investors typically consider three primary reasons when deciding to sell a stock: reaching fair value, capturing better opportunities, and a change in investment themes. However, emotional biases and cognitive errors can hinder rational sell decisions.
Reaching Fair Value: Overcoming Emotional Bias
Halo Effect: A tendency to cling to successful positions, which delays selling.
Loss Aversion: A reluctance to realize losses on underperforming positions, preferring to wait for a recovery.
Solutions:
Quantify Qualitative Judgments: Measure company characteristics such as competitive moat, management quality, and financial soundness to compare with other holdings and replace lower-ranked assets.
Blank Slate Test: Imagine rebuilding your portfolio from scratch and select assets anew, thereby eliminating emotional attachment.
Maintain Terminal Inputs: Be cautious about frequently altering the final assumptions (growth, risk, profitability) in your DCF model.
Regularly Consider Business Characteristics: Instead of selling at the market cycle’s peak, consider liquidating positions when market sentiment is exceptionally strong.
Partial Selling: For high-quality companies, consider reducing your position size rather than selling entirely.
Set a Fair Value Range: Establish an expected range of outcomes rather than a single precise fair value, allowing for flexibility.
Theme Change: Addressing Deviations in Investment Rationale
Companies evolve over time, and events such as mergers, acquisitions, or CEO changes can occur unexpectedly.
Investors may become overly attached to past investment decisions even when the original rationale is no longer valid or has changed.
Solutions:
Document Preliminary Sell Reasons: Record the risk factors you anticipated at the time of investment, and review these when they materialize.
Detect Warning Signs: Pay close attention to changes such as management turnover or shifts in business segments, especially factors that weaken the company’s competitive advantage.
Philip Fisher’s Three-Year Rule: Consider selling if the company fails to perform as expected within three years, as a hedge against inertia.
Minimizing Regret and Improving Investment Decisions
Recognize that sell decisions, whether the stock rises or falls afterward, may be accompanied by regret.
Learn from past sell decisions to improve future decision-making.
If you own a fundamentally strong company for the long term, exercising patience is crucial.
Conclusion:
Selling is both a portfolio management tool and a means of risk control. It is important to recognize the inherent biases and difficulties in making sell decisions and to determine the optimal selling point through rational analysis that excludes emotions. Be patient and focused, and sell only when there is a clear rationale, such as "better opportunities" or "a shift in the investment thesis."
