In the heart of the bustling city, where life’s myriad choices intersect, I stumbled upon a quote by Annie Duke that resonated deeply with me: “Success does not lie in sticking to things. It lies in picking the right things to stick to and quitting the rest.”
I realized this wisdom transcends life’s decisions and permeates the complex world of finance. It’s about knowing when to hold on and when to let go, whether you’re navigating the winding paths of life or the intricate corridors of investment.
Ask any seasoned investor about selling a stock, and they’ll likely cite a trio of reasons: the stock has reached its fair value, there’s a better opportunity elsewhere, or the investment thesis has changed. Each reason makes sense, but the art of selling is far from straightforward.

In the realm of finance, there’s a notion: “Buy 50 cents dollars and sell when someone offers you the dollar.” In essence, it suggests selling when a stock reaches its fair value, akin to cashing in a valuable chip. But finance isn’t as black and white as dollar bills; it’s about assets and their potential to create or destroy value.
So, what exactly is “fair value”? It’s a delicate balance, where both parties in a hypothetical transaction find satisfaction. Imagine you’ve calculated a $100 fair value for a stock with an 8% cost of equity. If all goes as expected, that stock will be worth $108 in a year. The question is, should you sell it?
Here’s where it gets tricky. You may encounter an investor content with an 8% return. To them, it’s a fair trade. So, should you part with your investment if you can’t find a better opportunity with higher returns? It’s a decision that warrants careful consideration.
The challenge doesn’t end there. When a stock approaches its fair value, there’s often a temptation to tweak your valuation assumptions. Rising stock prices can lead to doubts. “Am I missing something?” you wonder. But if you can’t pinpoint a legitimate reason for changing your forecast, it might be a sign to sell.
Moreover, selling a stock that’s nearing fair value isn’t just about finances. It can be an emotional battle. You’ve invested not only capital but time and energy. You might have spent years researching the company and following its journey. Parting ways might not feel right.
So, how do you overcome these mental and emotional hurdles? Here are some strategies:

     1. Resist Constant Tweaking: Avoid constant adjustments to terminal assumptions in your model. Minor changes in the short term won’t significantly impact your fair value. Terminal assumptions should be left untouched unless you have substantial reasons to alter them.
     2. Cyclical Thinking: In cyclical industries, aim to exit or reduce your position during the top quarter of the cycle, but it’s easier said than done.
     3. Partial Selling: Remember that you don’t have to sell an entire position when it reaches fair value. The public market allows you to sell gradually, maintaining your stake in a wonderful business.
     4. Think in Ranges: Rather than fixating on an exact fair value, think in terms of ranges. Consider the distribution of potential outcomes based on different assumptions.

Now, let’s shift the spotlight to another dilemma investors face: replacing an existing position with a new one. It’s a decision fraught with emotion. Holding onto a successful investment might make you hesitant to sell while resisting a loss on an underperforming one is equally challenging.
To make this decision less emotional, try quantifying your qualitative judgments about each company. Rank characteristics like competitive advantage, management quality, and financial strength in comparison to your other holdings. If a new idea ranks higher than an existing one, consider replacing it.
But there’s a deeper lesson here. Companies aren’t static entities. Over time, they evolve, influenced by various factors. As Warren Buffett aptly put it, “After ten years on the job, a CEO… will have been responsible for the deployment of more than 60% of all the capital at work in the business.”

Change is inevitable, and it’s your job as an investor to adapt. Sometimes, this means reevaluating your investments when something material changes for the worse.
One way to avoid falling into the quality trap is to keep a close eye on a company’s moat. Is it widening or narrowing? Be ready to sell when the moat begins to erode, no matter how great the company once was.
Finally, the decision to sell often circles back to the fear of regret. You don’t want to feel foolish if a stock rises after you sell it, or if the one you bought instead takes a nosedive. But investing is a realm of decision-making, and regret always lingers.
Embracing the possibility of being wrong is essential. As Daniel Kahneman wisely noted, “You need to inoculate yourself against regret.” Regret, painful as it may be, can also be your greatest teacher.

In the end, whether in life or finance, the art of selling is about making informed choices, understanding that change is inevitable, and being resilient in the face of regret. As investors, our journey isn’t defined solely by what we buy but also by when and why we choose to let go. It’s a path filled with lessons, and the key to mastering it lies in recognizing that success is not about sticking to everything but about picking the right things to stick to.