There are just three primary reasons for which you should consider selling your stocks:

1. Investment Reasons No Longer Exist

For example, Blockbuster was a great company for many years and was well ahead of the curve when it came to in-home DVD rentals. However, they didn’t adapt to the streaming revolution. In fact, Blockbuster turned down the chance to buy Netflix on three separate occasions.

2. Compromised Management

Small lies eventually lead to bigger lies. If you begin to spot inconsistencies in the way management communicates its shortcomings or if it starts to treat everyone else like a bunch of dunces, it is likely that the management is incompetent. You’re best served by getting out quickly.

3. Better Opportunities

Sometimes, better investment opportunities arise, and it makes sense to reallocate your capital to take advantage of them.

Remember to Keep the Following Investment Principles

  • The Warren Buffett Test: Buy great businesses at fair prices. See if you can describe the business to a 10-year-old.
  • Understand the True Business: How well do you know what drives the profits of the business?
  • Founder Syndrome: How honest and reliable is management? Is there a succession plan in place, or does it all depend on the founder?
  • Intangible Assets: Does the company have any brand loyalty? Does it have intellectual property like patents or trademarks? These are things that don’t show up on a balance sheet.
  • Management Quality: How well does management align the business with the economics of the industry? How well do they reinvest capital?
  • Sales and Marketing: How dedicated is the company to sales and marketing? What is the quality of their teams? How are their key metrics looking year-to-year?
  • Long-Term Focus: Is management focused on short-term metrics, or does it invest resources for the long run?
  • Moat: A moat is a phenomenon that gives a company an unfair advantage in its field. It could be brand loyalty, a superior supply chain, sheer size, etc.
  • Can It Weather a Storm?: How well will the business perform under a stress test?