When to sell: the thesis, not the price

"The nature of not doing very many things, and being careful about them, will probably keep you from making big errors of commission. Now, errors of omission are the big sins."

The nature of not doing very many things, and being careful about them, will probably keep you from making big errors of commission. Now, errors of omission are the big sins.

The decision to sell shouldn't come from how much the price has risen or fallen, but from whether the reason you bought in the first place still holds.

The most common mistake is letting the price decide for you: selling out of fear when a stock falls, or selling quickly to lock in a small gain when it rises a bit. In both cases the decision is driven by the price's movement, not by any change in the facts that motivated the purchase.

There are three legitimate reasons to sell, and none of them is "the price moved". The first is that the thesis has broken: the fundamentals have genuinely worsened, not just in the market's expectations - rising debt, margins compressing structurally, a competitive advantage that's eroding. The second is that the price has moved above your fair value estimate and the margin of safety has gone to zero: selling here isn't a defeat, it's confirmation that the analysis was right. The third is finding a clearly better opportunity for the same capital - not simply a different idea that looks more exciting.

Selling because the market as a whole is falling, or because everyone around you is selling, is none of these three reasons: it's the most common way to turn a paper loss into a permanent one. If none of the three reasons above has changed, a price drop alone isn't a reason to sell - it can even be a reason to buy more, with a wider margin of safety than before.