Many investors struggle to determine the right time to sell a stock. While buying at the right price is crucial, knowing when to exit a position is equally, if not more, important.
This article presents a systematic approach to selling stocks based on three key principles:
Did You Make a Mistake?
Has the Company’s Fundamentals Changed?
Has the Stock Reached or Exceeded Its Intrinsic Value?
1. Recognizing Mistakes
Even legendary investors like Warren Buffett admit to making mistakes. Errors can stem from misinterpreting competitive dynamics, misjudging regulatory risks, or simply miscalculating intrinsic value.
If an investor realizes they made a fundamental error in their analysis, the best course of action is to sell the stock and reallocate capital to a better opportunity.
Example:
An investor purchased foreign stocks but forgot to factor in currency exchange rates. After correcting the miscalculation, it became evident that the stock was overvalued. Fortunately, the purchase price was low enough to still generate a profit—highlighting the importance of a margin of safety.
2. Monitoring Fundamental Changes
Even a well-researched stock can become a poor investment if the company’s business conditions deteriorate. Competitive threats, regulatory changes, or macroeconomic shifts can significantly impact a company’s future profitability.
Example:
During the COVID-19 pandemic, Warren Buffett sold airline stocks. Despite initially holding these stocks long-term, the uncertainty surrounding the recovery of the travel industry prompted a reassessment of their intrinsic value.
Investors should continuously reassess their holdings and be willing to adjust their portfolios when new, material information emerges.
3. Selling When the Stock Reaches Its Fair Value
If a stock has appreciated to its intrinsic value (or exceeded it), selling becomes a logical decision.
Value investors estimate a company’s worth using methods like:
Example:
Suppose an investor calculates Bank of America’s intrinsic value to be $50 per share.
Applying a 50% margin of safety, they only buy the stock if it falls below $25 per share.
As the stock price rises, they monitor its valuation.
Many value investors begin selling at 80% of intrinsic value ($40) and fully exit at 100-110% of fair value ($50-$55).
Key Takeaways
Investors should sell when:
They made a mistake in their analysis
The company’s fundamentals have significantly changed
The stock price has reached or exceeded intrinsic value
By following these rational, fundamentals-based criteria, investors can avoid emotional decision-making and focus on long-term profitability.
[Compliance Note]
All posts by Sellsmart are for informational purposes only. Final investment decisions should be made with careful judgment and at the investor’s own risk.
The content of this post may be inaccurate, and any profits or losses resulting from trades are solely the responsibility of the investor.
Core16 may hold positions in the stocks mentioned in this post and may buy or sell them at any time.
