Jonathan Wellum: The Biggest Mistake Investors Make With Winning Stocks

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**Maggie Lake** (1:33)
Jonathan, we spent a lot of time talking about what to buy, but one of the decisions investors seem to really struggle with it most is when to sell, especially when it comes to their winners. How do you approach this conversation with clients?

**Jonathan Wellum** (1:45)
Yeah, I agree. As a professional, I've been doing this for, I guess, my 37th year. That sell discipline is really tricky, especially if you're a value investor and you believe in holding something for the long-term.
You understand the whole issue of compounding.
I think, first of all, I'd say your default position on a high-quality business that you own should be to own it forever. That's your default position. You should have that in your mind when you go into it. Can I own this business forever? If the market closed down, Buffett often says, and there was no value being put out there in terms of your business, the stock price wasn't out there, you'd be quite happy to hold that business. Having said that, clearly, the world changes and your ideas change and opportunities change. I think you should hold your winners as long as possible, but here's three reasons why you should also sell and do this in a disciplined way. Number one, the fundamentals have deteriorated in your business. You bought a business, you had great expectations, you had these growth prospects, you built it into your Excel spreadsheet, and all of a sudden you go, this isn't growing, there's problems. They're losing market share, margins are not growing, they're actually maybe being compressed, and you start to look at those fundamentals, and they're looking like they're deteriorating, and not just in the short run, but it looks like there's a permanent change in the business. If that's happening, you need to sell as quickly as possible, even if there's tax implications and so on, because that's going to be dead money and probably a business is going to go down in value. If there's fundamentals have deteriorated to the extent that the future is not going to be great. Second would be that the stock does get significantly overvalued. And that's something that clearly could be something that's very relevant today. You've owned a stock, it's gone up an awful lot, and you're looking at it and you're going, yeah, this is trading at 25, 30, 40, 50 percent premium to what I think it's worth. Then you start to think, should I take money off the table? What are my options? Because if you take money off the table, you should evaluate what are my tax implications? If there are, if it's in an IRA or a registered account, then there won't be the tax implications. But if it's an open account, I'm going to have to give up some money in tax, factor that in, and then start looking at alternative investments that could buy a better price, it'll have a longer term trajectory, a higher rate of return. Then you'll sell that position too. But you might not sell all of it. Because if it's a really great company, you might just trim back and reposition some of that money. We saw Warren Buffett do that with Apple, actually. He's exceptionally well with Apple. He didn't sell it all, still has some, but he started trimming back the Apple, became a large portion of his portfolio and so on. You can then keep an eye on that business if it continues to become even more overvalued and you find other opportunities, then you can continue to trim. Overvaluation, and then the other thing would be clearly a better opportunity.