Lesson 9 of 9
When to sell
Fisher allowed three reasons to sell: a wrong judgement, a business that no longer qualifies, or a clearly better use for the money. Never the price alone.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Fisher allowed three reasons to sell: the original judgement was wrong, the business no longer qualifies, or the money has a clearly better use.
- The price on its own is never one of the three. It is a record of what happened, not a reason for anything.
- The hardest case is a broken thesis with the price down: selling means admitting the loss, and Fisher found investors hold on to break even.
Fisher's chapter 6 gives three reasons to sell a stock. The original judgement was wrong. The business no longer qualifies by the standard that was applied. Somewhere else offers a clearly superior return for the same money. A fourth reason, that the price has gone up or down, is not on the list.
What changed, in each of four positions
RowsThe thesisColumnsPrice since purchase
Intact, Down
Intact, price down
Intact, Up
Intact, price up
Broken, Down
Broken, price down
Broken, Up
Broken, price up
The three reasons, in Fisher's order
The original judgement was wrong. Something believed about the business at purchase turns out to be false. This is a mistake in the analysis, found after the fact, and Fisher treats admitting it quickly as a skill in its own right.
The business no longer qualifies. Management changed, growth slowed past the point the reasons required, or a guardrail broke and the diagnosis in the previous lesson found the reason itself had failed. This is the guardrail discipline's own output arriving at a decision.
Money is needed for a clearly better opportunity. Fisher says this reason seldom arises and should be acted on only when the investor is very sure, because a holding you know well has known faults and a new one has unknown ones. Lynch describes the same test in chapter 17: he sold when another company had a better story, especially once the current story began to sound unlikely.
Why the price alone is not a reason
A rising price does not repair a broken reason, and a falling price does not break an intact one. The matrix above is the whole discipline stated once: read down from the thesis, never sideways from the price.
The bottom-left cell is where the discipline is tested hardest. Fisher wrote that more money was lost by investors waiting to come out even than for any other single reason. The bottom-right cell is hard for a different reason: a rising price can look like proof. Both are the same decision wearing different numbers.
What Lynch adds about the two intact cells
Lynch's chapter 17 lists healthy companies whose prices fell in market breaks and later recovered: the price had moved, the business had not. Selling here because the price is uncomfortable is selling for the fourth, unlisted reason. The same chapter says the opposite case, top-right, is the harder one to hold through: it is normally harder to stick with a winning stock after the price rises than to believe in it after the price falls.
Check yourself
According to Fisher's three reasons, which of these is a valid reason to sell?
- The price has risen sharply since purchase
- The business no longer qualifies by the standard originally applied to it
- A different stock has been getting more attention lately
Show the answer
Answer: B.
Fisher's three reasons are a mistake in the original judgement, the business no longer qualifying, and a clearly better use for the money. Price alone is not one of them.A holding's thesis has broken, and the price is still up since purchase. What does the discipline in this lesson support?
- Hold, because the rising price shows the thesis is working
- A broken thesis is one of Fisher's reasons, whatever the price has done
- Wait until the price falls before deciding
Show the answer
Answer: B.
The bottom-right cell is hard precisely because the gain can look like proof. The thesis, not the price, is what decides.A thesis is intact and the price has fallen. Where does selling on that alone sit on Fisher's list?
- It is usually the right time to sell and preserve capital
- Nowhere: price alone is not one of the three
- The thesis should be rewritten to match the new price
Show the answer
Answer: B.
Nowhere: price alone is not one of the three. Lynch's market-break examples are healthy businesses whose prices recovered.Sources
- Fisher, Common Stocks and Uncommon Profits, 1958, chapter 6, on the three reasons to sell.
- Lynch with Rothchild, One Up on Wall Street, 1989 (millennium edition 2000), chapter 17, on the best time to buy and sell.
What this leaves out
- The matrix and the four holdings are illustrative categories, not a rule that predicts what any real position will do next.
- This lesson does not say when a business no longer qualifies for any particular reader's standard. That judgement belongs to the guardrails set earlier in this course.
- Loss aversion, covered in behaviour and decisions, makes the bottom-left cell harder to act on than naming it can fix.
- Nothing here is advice about any security.