The great Warren Buffett has been quoted as saying his favorite holding period for stocks is forever. However, even the investor who is known as the quintessential ‘buy and hold’ shareholder is surprisingly active when it comes to his stock portfolio. Large investors like Buffett are often required to file SEC form 13F which discloses many of their recent buys and sells. Just on their latest 13F alone, Berkshire disclosed transactions in multiple stocks including GOOG, DAL, M, NYT, CVX (selling nearly 46 million shares or almost their entire position), V (total exit), MC (total exit), AMZN (total exit), UNH (total exit), DPZ (total exit), STZ (total exit), BAC, NUE, and many others. And that was just for a 90-day period!
So, if even Mr. Buy and Hold himself regularly liquidates stock, what criteria should an investor be considering when it comes to selling?
First, I want to distinguish between selling some or all of a given position versus getting out of stocks entirely. You may have a retirement account with a 10+ year investment time horizon that stays fully invested in stocks even if you are selling certain positions (in part or in whole) periodically and replacing those with other stock investments. The point being, you could make a sell decision while still staying fully invested for the long term.
Factors to consider when selling stocks:
- A material long-term deterioration in fundamentals (think owning a Blockbuster video rental store in the mid-2000s as movie streaming started taking off). This is the primary reason to sell a stock – the underlying fundamentals have changed for the worse and they are unlikely to get any better.
- The stock becomes clearly overvalued. This is often difficult to gauge given that we have learned that stocks can be considered ‘overvalued’ for a very long time and either maintain nosebleed valuations longer than expected, or grow into their excessive valuations over time. Think about AMZN which was considered overvalued for years if not decades, but eventually grew into its valuation and now trades on more traditional metrics. That said, there are clearly times when a given stock is trading near the high end of its historical range of P/E ratio or other valuation metrics which may be a good time to unload some or all of the position. That does not mean the stock can’t go higher, it just signals a potentially good exit point.
- The stock position becomes overly concentrated. Let’s say you enter a position and size it at 3%. Over time the stock goes up such that it becomes a 7% stake in your portfolio. The fundamentals and valuation are still sound, but you are now holding an uncomfortably large position. You may want to trim (sell a few %) or hedge the position for risk control purposes. This could also be considered a form of rebalancing.
- You have upcoming cash needs. This should be considered well in advance – as in a year or two. This may be to accommodate a RMD in a retirement account or for some known cash outlay for which you’ll need to draw from an after-tax account. As we have all experienced, stocks can decline materially in a short period of time (just over a year ago, many of today’s winners cratered 30% - 50% or more in a matter of a few weeks – hence the need to plan in advance and not be forced to sell on weakness to raise cash).
- Tax considerations: For tax mitigation purposes, you may want to sell a stock but then re-enter the position after the required waiting period (typically after 31 days).
What is noticeably absent from the list:
- Trying to call a top (either for a given stock or the market as a whole). It does not take many April 2020s, or March 2025s or April 2026s to hammer home the point that timing short-term market/stock price movements is an impossibility, either on the down or upside of stock price movements.
- The stock price declines (selling for non-fundamental reasons). Stock prices drop all the time, often for reasons that have nothing to do with the long-term fundamentals of the business. Do not let fear or panic shake you out of an otherwise great business. Resist being one of the impatient investors who hands their hard-earned money over to the patient investors by selling when you ‘can’t take it anymore’ (read: likely at market lows).
You often hear people saying things like, ‘If I had only bought X (insert: NVDA, Bitcoin, etc.) 10 years ago I would have made a fortune!’ This of course assumes that person never sold (that he held through all of the 50% declines along the way) which is highly unusual and unlikely.
Oh, when it comes to diamonds being ‘forever’, from an investment perspective take a look at a 10-year price chart. Around 2018, lab grown diamonds started really taking off as the technology behind making them and a positive recognition by the FTC fundamentally altered the diamond market. Since then, the price of real diamonds has slowly drifted downward. I am not saying to go sell your wedding ring, but this is a great example of how fundamentals of an industry or given business/asset can make an investment less attractive and worth considering selling.
Just like you should have a plan when it comes to buying a stock, you should have a plan – or at least a few basic criteria - for when to exit the position in part or in whole. Doing so will likely improve both your bank size as well as your blood pressure.