Sitting around a metaphorical campfire with ASX investors, most of the time I'd wager the discussion will revolve around if or when to buy a certain ASX company or companies.
Whilst 'if/when to buy' is one of the most important decisions you can make investing, the concept of 'when to sell' is also an important one. Selling at the wrong time can turn a great buy into a terrible investment.
You might be sitting on a 200% gain on a stock for years, but if you panic and sell those shares for a 50% loss during a subsequent market crash that 200% on-paper gain isn't worth much in hindsight.
Thus, selling your shares is one of the most important and consequential decisions you can make when investing.
So here are 3 situations in which you might want to sell your shares
A stock becomes overvalued
If you bought a car that you know is worth $5,000, but someone offers you $20,000 for it – why wouldn't you sell? That's the question that we must ask ourselves every day when we check the prices of the shares we own. The market can often become over-exuberant and value companies at far beyond what they're actually worth.
I think if that becomes the case, it might be a good time to take some profits off the table – especially if you have a better place to put the money.
Overvalued stocks tend to correct to their true value over time – but be careful not to sell a fast-growing company just because the market has realised its potential. I'm sure anyone who bought CSL Limited (ASX: CSL) shares for $100 and sold when the share price hit $200 would be feeling a little silly today.
The company's story changes
This is a tricky one to identify – but it's also probably the best time to sell if you can. The world and the global economy is a constantly changing beast. A thriving company with a successful business model can quickly become undone by technology advancement or changing consumer preferences. Just think of Kodak, the former Fairfax Media, Nokia, BlackBerry and MySpace if you want some examples of companies that couldn't keep up.
So if you think one of your investments might be heading the way of the dodo, it might be a good time to sell!
Never…
Warren Buffett likes to say his favourite time to sell a stock is never, so who am I to argue? If you can find a top-notch company that you have a pretty good suspicion will be around for decades to come – the best time to sell might be never!
There's a reason Buffett has never sold his positions in Coca-Cola or American Express Co., even when they were arguably overvalued at various points in history. If a company is doing a good job of investing its profits for more future profits, why would you cut yourself out of the action?
Foolish takeaway
Although there can be a few good reasons to sell a share, there are always more occasions when selling might feel right at the time but turn out to be an error down the road. I myself like to buy shares hoping I'll never have to sell – it takes some of the pressure out of the investing process, if nothing else.
