When turmoil hits the stock market, it can be tempting to throw all positions overboard like unwanted rats on the ship.

Many beginners are focused on learning what to invest in and when to invest – and at some point, it hits them that they also have to decide when to sell the shares.

When Do You Actually Sell a Share?

When is it time to sell? That’s a good question.

Unfortunately, I’m going to be a bit annoying and say that it depends a lot on what kind of company you’ve invested in.

Not all investments should be treated the same way.

I’ll explain briefly…

In my upcoming 8-week value investor course, we divide companies into different categories. To make them easy to remember, we group them by different animals: the snail, the elephant, the cheetah, the bear and the wolf.

  • The snail is a very slow-growing company.
  • The elephant is a large company with even, stable growth.
  • The cheetah is a fast-growing company.
  • The bear is a cyclical company.
  • The wolf is a company with a turnaround case.

These companies shouldn’t be treated the same way.

We sell cyclical companies before a recession.

We want to hold on to the elephant and the cheetah.

The snail is a bit boring, and I only invest in it if it’s extremely undervalued due to some event – and then I plan to sell when the stock price has straightened itself out.

The important thing is that you get clear on what kind of animal you’re investing in – and think about when you plan to sell, even before you buy the share.

Have you done that? Few private investors do.

Why not? Because few people have a proven strategy they use to invest.

Most people just throw themselves at it.

In a way, that’s also fine – because you gain experience, and experience is important.

But I wouldn’t want to get into the driver’s seat of a car without getting road theory and driving lessons. There’s a higher risk of getting into an accident if you don’t know the traffic rules and don’t have some basic knowledge.

The same goes for the stock market.

The more knowledge you equip yourself with, the easier and more fun it will be for you – and there’s less risk of losing money.

Choose Companies You Want to Keep

I prefer to invest in companies that I see a long runway for – and that I plan to keep.

In other words, my “favorite animals” are the elephant and the cheetah. There are several reasons for this.

First, wonderful companies give a good return.

Second, there is less work in a long-term strategy because you don’t have to constantly find new investments.

Third, you don’t pay taxes before you sell. That means it’s more tax efficient.

When Should I Sell Wonderful Companies?

So let’s say you’ve invested long-term in a wonderful company with a long runway. When do you sell that position?

You only sell if something goes wrong.

What could that be?

  • If management is replaced by bad leaders with cloudy judgement or questionable characters with hidden priorities.
  • If something changes in the story (or the hypothesis you have built) about the company.
  • If a competitor sneaks in with a superior product.
  • If there’s innovation that threatens the company’s product or service.

If any of the above happens, you should consider pulling out.

Of course, this also means that you must always keep an eye on what is happening with your companies in the market.

How Do I Practice the Art of Not Selling?

The trick in the vast majority of cases is not to sell the shares. The question becomes: how do I avoid selling?

And that, actually, is a true art.

It can be tempting to sell when the mood in the market turns negative.

How do you avoid panic selling?

First, you need to have a solid strategy that you use to invest. I recommend value investing. This is the proven method that I invest by. You can learn about this in my e-book, in my webinars and in my upcoming 8-week course that will launch later this winter.

Second, you must get absolutely clear on why you are investing in the company you choose. You need to go through a checklist and build a small investment hypothesis about the company.

Third, if possible, bounce your hypothesis up against another wise value investor to test whether it holds up. It’s good to have an investment partner to discuss with – but it must be someone you really trust and whose mind you admire.

When in doubt, go through the hypothesis and the checklist again to evaluate whether anything has changed since you made the decision.

If nothing fundamental has changed, then you hold on.

Do you have any shares that you are unsure whether to sell?

How about entering the Managing Money Freedom Facebook group. Every week, I make a discussion post to match this week’s blog post.

You can write your question there.

To check out the Facebook group click here.