Ideally we never want to sell a stock, because compounding works better the longer the time period. When we sell our stock, we’re ending the compounding. Also, when you sell your stock for a gain, you now have to pay capital gains tax on the gain. If you hold a stock for 10 years before selling it, then you’re only paying tax once in that whole 10 year period. Alternatively, if you hold stocks for one year only, over a 10 year period you have to pay 10 sets of taxes.
So we ideally never want to sell, but there are a few situations in which we may need to:
- We Were Wrong = if you invested in a company based on some idea or perception or prediction, and that turns out to be wrong, you need to sell immediately. There’s no point waiting around, as soon as you realise that you’re wrong about something you need to sell-out before things get worse. Naturally you will want to hold onto the stock until you break-even – don’t do this. If you’re wrong, just cop it and sell-out immediately.
- Moat is Decaying = while we will always invest in companies with a moat that should theoretically last forever, sometimes technologies and societies can change so much that even the strongest moat can be destroyed. As soon as you notice that your company’s moat is ruined for some reason (new stronger competitor, brand image is destroyed, it’s now easier to switch out of a switching moat), you need to sell immediately. Don’t stick around for things to get worse. For example, PlayStation and Xbox have a strong switching moat whereby it’s too hard for game developers to make games for a different console. However, the rise of cloud-streaming may make the whole console system irrelevant.
- You Don’t Trust New Management = if you notice that there’s new managers running one of your stocks, and they’re doing some things that you don’t agree with – sell-out. If they’re doing bad deals, or investing in bad projects, or loading the company up with debt – sell-out. We are investing in companies with a strong moat, which means that even if the company has bad management, the company will still thrive. However, bad management can still hurt the stock in the short-term, so sell-our early and wait for a better buy-in point later on when management’s poor decisions start to hurt the stock.