By Brett Horn | Associate Director, Equity and Credit Analysis
Knowing when to sell a stock can be just as important as knowing when to buy one. More often than not, though, investors end up selling their winners far too early, while holding on to their losers for way too long. The best way to avoid this type of error is to have a solid sell discipline in place, even if one is a true buy-and-hold long-term investor. At Morningstar, we've traditionally honed in one five different reasons an investor should consider selling a stock: (1) the initial analysis of the firm (or the situation) was wrong; (2) the fundamentals at the firm have deteriorated (and future prospects are less than initially believed); (3) the share price has risen well above its intrinsic value; (4) there are better returning opportunities available for the same level (or an even lesser amount) of risk; and, (5) the stock position currently accounts for a significant portion of the investment portfolio. While our top managers tend to follow a similar construct in their sell decisions, the final point about concentrated stock positions tends not to be a leading driver of sales for more than a handful of them, with seven of our 26 Ultimate Stock-Pickers having more than 50% of their stock portfolio invested in their top 10 holdings, and four of those seven having more than 85% of their stock portfolio invested in their top 10 holdings.