IMPORTANT: Please read the disclaimer before continuing.

Whenever I talk to other investors, the question I’m asked most often is “When To Sell“. 

Do you face the same issue as well?

Unsurprisingly, I also get about the same number of people telling me they sold too early and missed out on huge gains. Are you one of them?

Before I get to talking about when to sell your stocks, I’d like you to imagine you are the king of an empire first. Each month, as you collect money from taxes, you have money left over, and you must decide where to allocate it. 

What would you do with this excess money?  

1. buy more gold bars to keep in your vault, or
2. invest it in a mining business that produces gold bars each month, or
3. keep the money and save it. 

From my interactions with our community, many of us would either (a) buy more gold bars, or (b) buy the mining business. After all, (b) would generate more gold bars since investing in assets is better than investing in money. 

This is what most people are doing now too. We know that holding fiat money* is one of the worst things we can do since the Federal Reserve is printing so much money that over time, the value of money will eventually erode. 

*Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it as is the case for commodity money. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies. [Ref: investopedia.com]

We can see that people are doing the right thing of putting their money into stocks, which is really great! But buying stocks is one thing, and selling it at the right time is another.

So, back to the million-dollar question — when should you sell your stocks?

Rule # 1 – Sell or exit ONLY when you find another asset that will definitely generate a higher return 

Ask yourself: Are you obsessed with locking in gains?  

Let me remind you: once you sell a stock, your ‘gains’ sit there, losing value. This time next year, those gains would have eroded around 5% (thanks, inflation).

I’ll illustrate with an example. I have shares of Fastly (NYSE:FSLY), which is currently growing at 40%. This means my money is compounding at 40%. 

If FSLY hits my target sell price and I sell the stock for the sake of locking in my gains, BUT I haven’t decided which (better) stock to buy next, my ‘gains’ money starts to erode. 

From this perspective, wouldn’t you agree that it’s wiser to continue to hold Fastly and let the money grow at 40%? Meanwhile, we can continue to study and search for other great growth companies. 

Once we discover the next great stock that can outperform Fastly’s 40% growth, we move our funds over, and our portfolio will grow even more. #strengthtostrength 

Key takeaway: When you hold cash, there is always an opportunity cost. In this current economic climate, where money-printing has reached ridiculous levels, holding on to fiat money can cost more. We are better off deploying our money into good-quality, growing assets. The aim is to collect and grow assets steadily over time, rather than keeping to that narrow focus on locking in the gains. 

Remember: assets generate cash, not the other way around. 

Rule # 2 – Sell only when the fundamentals of the business change

Only sell when business fundamentals change. 

To recap: we study a company’s revenue, profitability, assets, liabilities, growth potential, etc. These are known as its fundamentals.

Through study and deep research, we can calculate a company’s financial ratios and make the all-important decision whether to enter, increase our position in, or close, a position in its stock. 

Let’s say I need my portfolio to grow at 30% or more per year within 12 years to achieve my goal of becoming a full-time investor*.

If the revenue growth rate of a company on my portfolio falls below 30%, I will exit this position and re-allocate my resources to a better growing company. 

An example of fundamentals eroding is when a company is losing market share to competitors. 

Let me explain more by sharing with you this chart (below). It’s a chart of cyber security players in the industry. 

In this diagram, we see that Symantec lost huge market share in 2019 to Crowdstrike (NASDAQ:CRWD). 

If I owned Symantec shares, I would exit my position for sure, because fundamentals have changed. 

*If you want to know how to calculate how much you’ll need and how long you’ll take to achieve full-time investor freedom, watch my video here or read here. 

Rule # 3 – Don’t Sell Winners and Hold Losers 

This may be harder than it sounds for some of us. People often share how hard it is to part with ‘losers’. They rush to sell winners to lock in gains of 10% to 15%, denying themselves potential gains of 100% or 200%. 

And they are terrified to exit a loser because they hope (against hope) that the price will ‘recover’.  

Let me share this example. 

If CRWD (growing 80% yearly) is part of your portfolio, your investment would more than double in 1.5 years. 

If you bought CRWD without fully understanding its business and growth potential, and sold after a 10 – 15 % profit on your initial investment, you would have made a decision that left a lot of money on the table. 

This is a classic scenario of people selling their winners and holding losers hoping those will recover.

As humans, we are wired to avoid pain. Sometimes our brains know it’s time to cut losses (e.g., when something fundamental changes in a company, or when its growth thesis no longer plays out). And our hearts tell us to hold on, that maybe one day the stock price will return to our ‘breakeven’ point. Can you relate? I know I can. Let me tell you, it’s a costly decision! 

It all comes down to opportunity cost. So let’s say I exit my position in a lousy company, realizing a 20% loss, and I re-deploy this money to a company growing at 80% (e.g., CRWD). 

What happens? I start to ‘make back’ that loss. In the long run, the longer you drag out or hold your losers, the higher those opportunity costs run. 

These three rules have served me well and I hope they will help you too.