Hi folks, happy to be participating here on Commonstock! I look forward to chatting with more of you soon. Today, I want to share some thoughts on portfolio management—specifically, when to sell.

Thomas Phelps, author of the classic 1972 text on multibaggers 100 to 1 in the Stock Market, said that to make money in stocks we must have the "the vision to see them, the courage to buy them, and the patience to hold them".

With valuations now stretched versus historical averages, even to "hold them" might require some courage.

The discipline I was taught by my mentors was to buy the best-quality issues you can, without overpaying. Then, if they surge in price, trim some off the top rather than booting them out of the portfolio altogether. (I know I sound like a 75-year-old former floor trader by calling stocks “issues”, but you can't make me say the word “stonks” dammit. Let’s move on…)

So, when do you trim, and when do you sell out completely? Trimming is prudent when you still believe in your initial investment thesis, but the position has, through price appreciation, swelled to a weight that leaves you underdiversified. Only you yourself can determine what a “too-big” weight is for you, but it’s worthwhile to spend some time thinking it through. And please, never confuse machismo with a concentrated portfolio… a topic for another day.

When deciding whether to trim or sell an outperforming position, retail investors enjoy an advantage over pros. Say it’s mid-September and a portfolio manager has achieved outperformance for the year so far. He has a big incentive to take risk off to protect his bonus. But a retail investor is considering her personal long-term wealth, not her return for a particular year. She isn’t forced to peel off risk. So she can weather volatility as long as her reasons for owning the stock are intact.

This is why I think Commonstock is a terrific tool for retail investors: the opportunity to write up and publicly post a rationale for entering a position crystallizes your “why”. That makes it easier to face it head-on when the “why” no longer applies. It’s a bulwark against bias.

An investment memo doesn’t have to be a 20-page writeup jammed with charts to make a valid argument. One of the best stock writups of all time was Warren Buffett’s "The Security I Like Best", on his investment in Geico—a one-page essay.

So write up your “why”, trim to keep weights in check, and monitor how fundamentals unfold versus your investment thesis. Peter Lynch was an expert at letting winners run, and his advice on portfolio management was: “Pull your weeds and water your flowers.” The next time you’re thinking about booting one of your top performers, look back on your initial investment thesis and consider whether you’re about to spray Killex on an orchid.

Can you recall a time you sold too early? Let me know below if so…