Superinvestors on when to sell a stock
Many investment advice centres around which stocks are good to buy and why. However, knowing when to sell a stock can be just as important as knowing when to buy one.
For many investors, selling is the most challenging investment process, often clouded by emotional attachments, fear of regret, or market noise.
However, some of the world’s most successful investors have mastered this critical decision and developed their own “formulas” to know when the time to sell is right.
Superinvestors like Warren Buffett, Charlie Munger, and Peter Lynch emphasize that selling should be guided by a clear understanding of the stock’s intrinsic value, the investor’s long-term goals, and the business’s fundamentals.
Many of the world’s top investors follow the strategy of value investing, whereby they hold a stock that they believe will continue to grow for a long period of time.
For example, billionaire Warren Buffett famously said that his “favourite holding period is forever”, but even he acknowledges that there are times when selling makes sense.
Superinvestors also caution against common pitfalls, such as trying to time the market or selling out of panic during market downturns.
These investors have consistently outperformed the broader market by maintaining discipline and a long-term perspective.
Below is an overview of the advice five superinvestors have given on when to know that it is time to sell.
Peter Lynch
Peter Lynch is a renowned investor and former manager of the Fidelity Magellan Fund, where he achieved an extraordinary annualized return of 29.2% from 1977 to 1990.
Under his leadership, the fund grew from $18 million to over $14 billion, solidifying his reputation as one of the greatest investors of all time and earning him the nickname “The Wizard of Wall Street”.
Lynch is known for his “invest in what you know” philosophy, which encourages individual investors to identify opportunities in familiar industries.
In an interview, Lynch once said his two greatest mistakes were selling his stakes in Toys R Us and Home Depot too early.
“It’s funny, in a stock, all you can lose 100% – I’ve done that – but your greatest mistakes are selling a good company, and then it doubles, then it triples and quadruples,” he said.
“Some of my mistakes have been saying, ‘This stock is too high’, and I was wrong.”
He compared investing to baseball, saying investors should stop and assess in what “inning” they’re in with a particular company.
He said investors should consider why they bought a particular stock and, from the start, decide what “story” they will have with the stock based on their expectations for the company’s growth.
“You have to say to yourself, ‘In this stock, I have a 10-year story or a 20-year story. I’ll be able to write that down and follow that with what I do with the company,” he said.
He urged investors to review their holdings often to check if the “story” has changed.
Then, investors should sell if the “story” has played out as expected, the stock did not live up to expectations, or something fundamentally changed with the company.
“This is the problem that people have: they sell stocks because they didn’t know why they bought it, then it went down, and they don’t know what to do,” he said.
Warren Buffett
Warren Buffett, often called the “Oracle of Omaha,” is one of the most successful investors in history.
As the chairman and CEO of Berkshire Hathaway, he transformed the company into a global conglomerate with interests in insurance, railroads, utilities, and consumer goods.
Buffett is renowned for his value investing strategy, focusing on buying high-quality businesses at fair prices and holding them for the long term.
Therefore, when Buffett does choose to sell a stock, it usually makes headlines all across the world.
When asked about his thought process behind choosing when to sell, Buffett reiterated that it is not in Berkshire Hathaway’s natural inclination to sell.
For example, the firm has held a stake in Coca-Cola since 1988 and American Express since 1991.
Buffett explained that there have been different reasons for selling throughout his career.
Closer to the start, he would sell if he needed money for a different investment, “but that has not been the problem the last 10 or 15 years”.
“40 years ago, my sales were all because I found something that I liked even better. I hated to sell, but I also didn’t want to borrow money, so I would reluctantly sell something that I thought was terribly cheap to buy something that was even cheaper.”
“Those were the times when I had more ideas than money. Now, I’ve got more money than ideas and that’s a different equation.”
He said the firm now chooses to sell if it reevaluates a business’s economic characteristics and finds that the long-term competitive advantage it initially saw in the company has diminished.
“That doesn’t mean we think that the company is going into some disastrous period or anything remotely like that, but we probably don’t think that their competitive advantage is as strong as we might have thought when we initially made the decision.”
Bill Ackman
Bill Ackman is a prominent hedge fund manager and the founder of Pershing Square Capital Management, a leading activist investment firm.
Known for his bold and often controversial investment strategies, Ackman has built a reputation for taking significant stakes in companies and advocating for changes to unlock shareholder value.
Over the years, he has led high-profile campaigns involving companies like Herbalife, Valeant Pharmaceuticals, and Chipotle.
Ackman’s disciplined approach to investing, combined with his willingness to challenge corporate management, has made him a key figure in the financial world.
Ackman’s advice on when to sell a stock is simple – “you should sell an investment when you learn new information which is inconsistent with the original thesis”.
He explained in an interview with Interactive Investor that his firm’s business is finding companies where they can predict with a high degree of confidence what that business looks like over a long period of time.
“The only way to value a company, in our mind, is not just picking a multiple of next year’s earnings,” he said.
“The right way is to find a business where you can predict with a high degree of confidence what the cash flows will be over many, many years and build them up.”
“If you have a thesis going in, and then new facts emerge that are inconsistent with the thesis, generally, if you keep twisting the thesis to come up with a reason for owning the stock, it is going to be a problem.”
He said this strategy has served his firm well and also allowed them to take a lot of the emotion out of deciding when to sell, using his firm’s sale of Netflix shares as an example.
“It didn’t take much courage for us to sell. We sold because it was the economically rational thing to do, and for me, courage is not required,” he said.
Seth Klarman
Seth Klarman is a highly respected investor and the founder of Baupost Group, one of the world’s largest and most successful hedge funds.
Known for his disciplined value investing approach, Klarman focuses on buying undervalued assets with a margin of safety.
Often described as a modern-day Benjamin Graham, he is the author of the investment classic Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor.
Klarman keeps a relatively low profile, with very few interviews over his decades-long career.
However, he has shared some wisdom with investors on how to know it’s the right time to sell.
Duncan Williams Asset Management described Klarman’s selling strategy, which focuses on realising gains as a stock approaches its intrinsic value.
Like Buffett, Klarman’s firm purchases undervalued stocks, i.e., stocks priced significantly below their intrinsic value.
For example, Baupost may buy a stock at $10, believing it is worth $20.
However, rather than holding the stock until it reaches its total intrinsic value of $20, they sell it slightly before that point, around $18 or $18.50.
This is where Klarman’s “margin of safety” principle comes into play – by selling before the stock reaches its perceived total value, the firm mitigates the risk of potential market fluctuations or corrections that could cause the stock to fall before it reaches $20.
Carl Icahn
Carl Icahn is a legendary activist investor and the founder of Icahn Enterprises, a diversified holding company.
With a career spanning decades, Icahn has built a reputation for acquiring significant stakes in undervalued companies and pushing for strategic changes to improve shareholder value.
His high-profile campaigns have involved major corporations like Apple, Xerox, and TWA, earning him the nickname “corporate raider” in the 1980s.
Known for his no-nonsense approach and sharp business acumen, Icahn has consistently delivered impressive returns.
The Motley Fool explains that, while Icahn is also a value investor, his approach differs from that of Buffett, for example.
Where Buffett tends to buy a stock with the intention of holding it indefinitely, Icahn will sell his stocks to lock in profits once the market figures out a company’s true value.
Icahn has long-term holdings, but his strategy is “less about building a diversified portfolio of stocks and more about making shorter-term bets on stocks that might be due for a quick increase in value”.
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