I need the money. 

That’s my numero uno reason for selling a stock.

There are many reasons why one might need the money. In the past, I have sold some stocks to raise funds for the downpayment of a home. I can see selling stocks to fulfill other obligations, such as paying down mortgage debt, paying for my child’s university education, or spending on unexpected medical bills. And while I am nowhere near retirement, there will come a day when our stock portfolio will support our living expenses. 

While all the above are perhaps obvious reasons for selling, I sometimes sell because I want to buy a stock but don’t have funds to initiate or add to a position. As both my wife and I are still working, we can regularly put money aside for investing, so the above scenario isn’t frequent. And I am thankful for that because I dislike making these ‘replacement’ decisions. 

You might ask why? 

Well, at a very high level, it means I need to get two decisions right: find a “winning” stock and sell a portfolio “loser.” The odds of winning on both actions are lower than the odds of getting one decision right. And for this reason, I am a big fan of keeping it simple. I generally buy after much due diligence, then add on execution as I see my thesis is playing out. Once I have taken care of the buying dynamics, I tend to not worry about the selling as I tend to look for those long-duration compounders. 

If you read thus far, you will notice that I don’t actively initiate selling. Yes, I follow the business performance, but I rarely actively decide to sell. I am more of a reactive seller. I sell when I need to. And I believe this process reduces the activity within my portfolios.

So, when I am looking for “sell” candidates, what are my considerations? 

Typically, positions I initiated but didn’t add to, and assuming they are still small, are often in the front of the queue. When “starter” positions don’t become a “full” position, in my view, it is a good one to sell. 

Below these, I look for businesses where the thesis is blowing up in my face. These companies have seen several quarters (sometimes even years) of middling to poor execution. Continually overpromising and underdelivering is a problem. Perhaps competition is starting to eat their lunch. Maybe the growth is slowing for this once-growth superstar. Maybe they have seen some significant turnover at the executive level; maybe the CEO or CFO left in a hurry. Those are all reasons for a sell consideration.

Next up in the line are companies that have executed brilliantly for a long time, perhaps even decades. Now they are moving from being the growth superstars of the last decade to becoming the steady performer of the next decade. I generally like to hold on to these. It is good to have some blue-chip quality businesses that perhaps also pay some dividends; they help cushion the volatility of my many fast-growing stars. But these can also be good candidates for trimming, especially if the position has become large by the sheer virtue of compounding. 

And related to the above is the idea of trimming some when a company’s allocation becomes too large. How much is “too large” will frankly vary from person to person. Investing is, after all, very personal. So I won’t throw any specific number out because my “upper limit” changes with time and circumstances. For instance, my largest holding is about 25% of our entire stock portfolio, and I am okay with it. I will caveat by noting that many folks will find that too high and suggest trimming to keep positions in the 10 to 15% region. To each their own, I say!

So, there you have it. The nuts and bolts of my selling process. 

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