When Should You Sell Your Shares?
In investing, it is always much easier to buy than to sell, as buying often comes with a detailed investment thesis and reasons which make the investment desirable. Many investors come up with a myriad of reasons for buying shares in a company, but when it comes to the act of selling, they tend to hesitate and scratch their heads in befuddlement.
Here are three reasons to consider selling your investment.
Reason 1: The thesis went wrong
The first reason would be if your investment thesis went awry – this would indicate that the original reasons for purchasing the investment have now been invalidated. Perhaps there was a sudden deterioration in the fundamentals of the business, an erosion in the market share of the company, or a persistent build-up of expensive debt.
We should carefully assess the facts and make a decision as to whether our thesis still remains valid. Note that business-declines do happen periodically as no one can predict the future and we are also not infallible, hence mistakes may be made now and then. I had previously written an article on why we should document our mistakes, which you can check out here.
Reason 2: Valuation becomes too high
The second reason for selling is if an investment becomes extremely expensive based on traditional valuation methods. Here, I am referring to the valuation of the company, and not its absolute share price.
If a share becomes over-valued with respect to its business prospects, then it may make sense to sell it and look for an under-valued share to purchase. By traditional methods, I refer to metrics such as the price-earnings (PE) ratio, price-to-book (PB) ratio, and dividend yield, to name a few.
Reason 3: Switching to another more attractive investment
The final reason to sell an investment is when a much more attractive investment opportunity comes along. In such a case, we should sell to raise cash in order to redeploy our proceeds to the more promising investment. Note that this can be a contentious decision, as what constitutes as “more attractive” is subjective, and we each will have our own personal criteria for evaluating the characteristics of each investment.
A decision to sell should not be taken lightly, as it may interfere with long-term compounding and wealth-building. The above three reasons encompass the major reasons for justified-selling, but even then, we should still carefully consider the ramifications of each sell decision before acting.