Why "Buy and Hold Forever" Is Destroying Your Returns
The truth about when the greatest investors actually sell their stocks
Ever wonder why the greatest investors seem to know exactly when to sell, whilst everyone else clings to losing positions until it's too late?
I did.
So I decided to do some research...
I spent months studying the selling strategies of investing legends like Warren Buffett, Charlie Munger, Seth Klarman, Chuck Akre, and Chris Mayer. We're talking about analysing decades of shareholder letters, interviews, and investment decisions. I also spoke with multiple fund managers who consistently outperform the market.
What I found shocked me.
The real pattern behind successful selling has nothing to do with what most experts teach.
The Research Method (And Why It Matters)
First, let me be clear about what I mean by "the art of selling." I specifically looked at:
Decision-making processes of top investors when exiting positions
Historical performance of portfolios with different selling strategies
Psychological factors that prevent investors from selling effectively
Real-world examples of both brilliant and disastrous selling decisions
Here's where it gets interesting.
The pattern I discovered wasn't about technical indicators, price targets, or even timing.
It was about something much more fundamental.
The Problem With "Buy and Hold Forever"
Traditional investing wisdom tells you that "the best holding period is forever." And for truly exceptional businesses, that's often the right approach.
But here's what most people miss:
Not every business deserves to be held forever, and knowing when to sell is just as important as knowing what to buy.
That's why you see portfolios filled with underperforming stocks dragging down overall returns. A company that was once a great investment doesn't automatically remain one as conditions change, but if investors refuse to reassess, they end up "watering the weeds" whilst neglecting the flowers.
This doesn't mean long-term investing is wrong; it's not.
Quality businesses should be held for years or decades. But blind loyalty to every position can be financially destructive.
And this is where the masters diverge from the masses.
How "Watering the Weeds" Destroys Returns
When investors allocate fresh capital to underperforming companies instead of their winners, they're essentially "watering the weeds" in their investment garden.
As Chris Mayer, author of "100 Baggers," has repeatedly emphasised in his writings and talks.
His research shows that just a few exceptional performers drive the majority of portfolio returns, and selling these winners too early while holding onto losers can devastate returns.
Charlie Munger put it more bluntly:
"Part of what you must learn is how to handle mistakes and new facts that change the odds. Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand."
This creates two major imperatives:
Stop watering the weeds. When a business shows persistent deterioration in its fundamental qualities, it's time to sell; regardless of whether you're sitting on a gain or loss.
Let your winners run. As Chuck Akre said in his investment letters: "We are inclined to hold these investments indefinitely as long as the companies continue to compound shareholders' capital at above-average rates." The key is distinguishing between your genuine compounders and the imposters.
The Psychological Barriers to Effective Selling
If this is so obvious, why do most investors struggle to sell effectively?
My research revealed specific psychological triggers that prevent rational selling decisions:
The Endowment Effect: Once we own something, we value it more highly than its actual worth. This makes selling psychologically painful.
The Sunk Cost Fallacy: Having invested time and money into researching and buying a stock, investors are reluctant to admit they were wrong.
Loss Aversion: The pain of realising a loss is psychologically twice as powerful as the pleasure of realising a gain.
The Masters' Framework for Selling
Seth Klarman, in his rare and sought-after book "Margin of Safety," outlines several legitimate reasons to sell:
When the original reason for buying no longer applies
When a company reaches full valuation
When you find a much better opportunity
When facts or conditions change significantly
Warren Buffett has evolved on this topic.
Whilst he famously said "our favourite holding period is forever," his actions tell a more nuanced story. He's sold airlines, IBM, and many other investments when the fundamental thesis changed.
The Five Clear Signals It's Time to Sell
Based on my study of these investing legends, here are the five clearest signals that it's time to sell:
Deteriorating Business Fundamentals: When competitive advantages erode, cash flows decline, or management quality slips.
Better Opportunities Elsewhere: As Munger put it, "Opportunity cost is a huge filter in life. If you've got two suitors who are eager to have you, but one is way better than the other, you're going to marry the better one."
Excessive Valuation: Even great businesses can become terrible investments at the wrong price.
Management Changes For The Worse: Chris Mayer particularly emphasises watching for shifts in management incentives and behaviour.
Your Initial Thesis Was Wrong: The ability to recognise and correct mistakes quickly separates the best investors from the mediocre.
The Bottom Line
The greatest investors aren't afraid to sell when circumstances warrant it. They understand that capital is finite and should be allocated to your best ideas.
As Charlie Munger famously quipped, "A great business at a fair price is superior to a fair business at a great price." But the corollary is equally important: A deteriorating business at any price is a weed in your portfolio.
Your job?
Stop watering the weeds.
You can see our portfolio, investing philosophy, and the types of companies we invest in here:
Overall, try and cultivate a portfolio of quality businesses and be vigilant about pulling the weeds before they choke your garden. Because when you water the weeds, opportunity withers.
On that note, here's an opportunity for you…
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We hope you liked this post and have a great week ahead,
Dom
Founder & Chief Investment Officer
Schwar Capital
Question: What's your approach to selling investments? Have you ever held onto a position too long or sold a winner too early? Share your experience below - I read + respond to every comment! 💡
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Disclaimer: The content provided in this newsletter is for informational purposes only and does not constitute financial, investment, or other professional advice. The opinions expressed here are those of the author and do not necessarily reflect the views of Schwar Capital. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The author may or may not hold positions in the stocks or other financial instruments mentioned. Always do your own research or consult with a qualified financial advisor before making any investment decisions.
Nice summary. Still a lot of nuanced knowledge required to recognise temporary headwinds vs change in long term business fundamentals. I have found that overvalued companies can stay that way for sometime. Sometimes, they grow into the valuation, so I don’t want to sell just because it’s at or over fair value. Recently trialing use of some medium term technical analysis trend change indicators to provide some “ rules” around when to sell a great, but overvalued company so I can rotate capital into a better opportunity. Keep these companies on a watch list to consider re-purchase if they become very undervalued again.
Great piece! I always make it a point to write a 'post-mortem' analysis and establish a clear valuation for selling when I enter a position. This practice helps me stay honest with myself, especially if the situation deteriorates. I've also learned the importance of exiting early and reassessing my strategy rather than waiting for things to improve blindly.