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Knowing when to sell a stock is often trickier and more emotionally charged than knowing when to buy. We turned to Paul Larson, former chief equities strategist at Morningstar and a respected voice in long-term investing, for his insights on what the selling process should entail. In his 2007 whitepaper ‘When to Sell (and When Not to Sell)’, Larson distilled years of market experience into a framework that remains timeless in its clarity. Drawing on that paper, we spotlight four sound reasons to part ways with a stock and four instances where selling might be premature or even downright counterproductive.
When to sell
- The business is not what you thought it was
Sometimes, the problem isn’t the market or the stock, it’s the original assumption. You may have thought you were investing in a high-growth company with a strong moat, but it turns out to be a slow-moving or poorly run business. As Larson puts it, “It’s a mistake to cling to a stock merely because you paid a certain price for it.” If your core thesis no longer holds, it’s time to move on. - Management is no longer trustworthy
Every time you buy a stock, you’re essentially becoming a silent partner in that business. So, if the management starts making decisions that destroy value like overpaying for acquisitions, taking on excessive debt, or rewarding themselves at the cost of shareholders, it’s time to exit. - The stock is trading well above its fair value
This is a more straightforward reason. If the stock has run up significantly and now trades well above your fair value estimate, it’s often wise to sell and redeploy the money in more reasonably priced opportunities. In Larson’s words, “It makes sense to sell a dollar trading for $1.20 to buy a dollar trading for 80 cents.” The goal isn’t to guess peaks and bottoms, but to optimise returns. - You’ve found better investment opportunities
Even if a stock is not overvalued or flawed, you might still want to sell it if there are better options available. Selling a stock to fund a higher-conviction idea or to trim an overweight position can improve your portfolio’s long-term return and risk profile. Think of it as upgrading your portfolio, not abandoning it.
When not to sell
- Just because the stock is in decline
A falling share price does not automatically mean something is wrong. If the underlying business remains solid and the fall has only made the stock more attractive, it could actually be a buying opportunity and not a reason to exit. A price drop doesn’t need to trigger panic, revisit the fundamentals before reacting.
- Just because the stock has gone up
A rising stock price can tempt investors to cash in quickly. But if the company’s story remains strong, you could be exiting just before the real gains kick in. Don’t let short-term profits make you miss out on long-term compounding. - Insider selling creates panic
Investors often worry when company insiders sell their shares. But such sales may not always be a signal about business health. Larson cautions that “insider selling is not as predictive as insider buying,” and warns against reading too much into it without proper context. - Negative news or analyst downgrades
It’s easy to react to news headlines or stock downgrades, but these are often short-term distractions. Focus instead on the company’s long-term fundamentals. Markets are noisy, but true value emerges over time. Resist the urge to react to every tremor.
Bottom line
Selling decisions shouldn’t be emotional. They should be rooted in reason whether it’s a flawed business model, poor management, excessive valuation, or a better opportunity. On the other hand, don’t let fear, headlines, or short-term price movements drive your exit.
As Larson reminds us, “The stock doesn’t know that you own it. The market doesn’t care about your cost basis.” That’s a powerful nudge to keep your focus where it belongs—on future potential, not past decisions.
Need help navigating tough stock decisions? Explore Value Research Stock Advisor that offers analyst-vetted stock recommendations backed by deep research and data-driven insights.
Also read: How do investors sell? It's more emotional than you think
This article was originally published on June 22, 2025.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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