Investing isn't just about buying low—it's also about knowing when to let go. While many focus on finding the perfect entry point, seasoned investors know that timing the exit is often far more critical. As the market saying goes, "The ability to buy makes you a student; the ability to sell makes you a master." But what exactly should prompt you to sell? Let’s break it down with clarity, logic, and practical insights.
Two Schools of Value Investing
Value investing remains one of the most respected approaches in equity markets. At its core, this philosophy rests on key principles:
- Buying stocks means owning a piece of a business
- Seek a margin of safety at purchase
- Price fluctuates in the short term but converges with intrinsic value over time
- Stay within your circle of competence
Over decades, value investing has evolved into two distinct schools:
- The Graham School – Named after Benjamin Graham, this approach focuses on buying undervalued assets and selling once they reach fair value. The profit comes from valuation correction.
- The Buffett-Munger School – Championed by Warren Buffett and Charlie Munger, this method emphasizes buying excellent businesses at reasonable prices and holding them indefinitely. Returns come primarily from long-term business growth.
While both strategies aim for long-term gains, their exit strategies differ significantly.
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To Sell or Not to Sell: The High-Valuation Dilemma
One of the most debated questions in investing is: Should you sell when a stock becomes overvalued?
Warren Buffett famously avoids selling great companies even when they appear expensive. His rationale? It’s extremely difficult to find businesses with durable competitive advantages, consistent cash flows, and strong management. Selling such a company means replacing it with something potentially inferior.
Li Lu, founder of Himalaya Capital and known as "China’s Buffett," once shared his evolving mindset:
“I used to have a rule: if I wouldn’t buy at this price, I’d sell. Now, when I truly understand a business, I think like an owner. Even if the price seems too high to buy more, I don’t want to sell—because the long-term outcome still favors ownership.”
This perspective highlights a crucial shift—from trader mentality to business ownership mentality.
But here’s where context matters.
Why A股 Investors Need a Different Approach
While Li Lu’s logic holds in stable, mature markets like the U.S., the A-share market presents unique challenges:
- High speculation: Stocks often don’t just become overvalued—they become irrationally overvalued.
- No capital gains tax: Unlike in the U.S., there's no tax penalty for realizing gains in China, eliminating one major disincentive to sell.
- Shorter investment horizons: Not all investors can or want to hold for decades.
Therefore, while high valuation alone may not justify selling a fundamentally strong company, extreme overvaluation should trigger serious reconsideration.
As Zhang Kexin, founder of Glade Asset Management, puts it:
“Many Chinese value investors underperform because they equate value investing with never selling. But if a stock trades far above its intrinsic value, what are you waiting for? A crash?”
So when does overvaluation become extreme?
Defining "Extreme Overvaluation"
There’s no universal formula for intrinsic value—it’s inherently subjective. However, investors can use relative benchmarks:
- Historical valuation ranges: If a stock typically trades between 15x and 50x P/E, hitting 70x may signal overheating.
- Industry comparisons: Is the valuation stretched compared to peers?
- Cash flow sustainability: Can earnings support current multiples long-term?
Common valuation tools include:
- P/E ratio: Best for stable, profitable companies
- P/B ratio: Useful for capital-intensive or cyclical industries
- DCF models: Ideal for firms with predictable cash flows (e.g., utilities, pharmaceuticals)
- PS ratio: Applied to early-stage or unprofitable growth companies
Remember: High multiples aren’t always bad—especially for fast-growing tech firms. The key is understanding why the valuation is high.
What Should You Buy After Selling?
For many value investors, holding cash isn't an option. As Li Lu notes, selling should only happen under three conditions:
- You were wrong about the investment
- The stock is absurdly overpriced
- You’ve found a better opportunity
This third point underscores a core principle: portfolio optimization is an ongoing process. Every holding must compete with potential new investments based on risk-adjusted return.
But beware of common traps when chasing “cheap” stocks:
❌ Trap 1: Non-Leaders in Winner-Take-All Industries
In markets dominated by one or two giants (e.g., e-commerce, social media), second-tier players rarely catch up—no matter how low their P/E.
❌ Trap 2: Mid-Tier Firms in Declining Sectors
Industries like traditional retail or print media offer little growth. Even low valuations won’t save you from structural decline.
❌ Trap 3: Cyclical Stocks at Peak Earnings
Take pig farming stocks during price highs—they often show low P/E ratios due to temporary profit surges. By the time earnings drop, investors are trapped.
For example, Muyuan Stock (002714) had a P/E over 400x in September 2019—yet prices were still rising. Later, as profits soared from high pork prices, P/E collapsed to under 10x—but share prices hit all-time highs.
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FAQs: Your Selling Strategy Questions Answered
Q: Should I sell a stock just because it's at an all-time high?
A: Not necessarily. Price alone isn’t a reason to sell. Focus on fundamentals—if the business is still strong and fairly valued, holding makes sense.
Q: Is it ever okay to hold cash?
A: Absolutely. Cash isn’t dead money—it’s optionality. Waiting for better opportunities is a valid strategy.
Q: How do I know if a stock is “crazy” overvalued?
A: Compare its current valuation to historical norms, industry averages, and growth prospects. If it’s 50–100% above its normal range without justification, caution is warranted.
Q: Can I re-buy a stock after selling?
A: Yes—but only if it meets your criteria again. Emotional attachment should never drive repurchases.
Q: Does long-term investing mean never selling?
A: No. Long-term investing means patience, not permanence. Sell when fundamentals deteriorate or valuations become unsustainable.
Q: Are index funds better for most people?
A: Often, yes. As Buffett advises, most investors should stick with low-cost index funds—diversified, passive, and proven over time.
The Right Path for Most Investors
Let’s be honest: mastering when to sell—and what to buy next—requires deep research, discipline, and emotional control. For average investors, frequent trading increases risk and reduces returns.
Buffett’s advice stands tall:
“I believe 98% to 99% of investors should be highly diversified and avoid frequent trading. Their approach should mirror low-cost index funds. That’s the right path.”
By investing broadly and holding long-term, you sidestep the stress of timing individual exits. No need to obsess over whether Tesla is overvalued or Alibaba is cheap—you benefit from overall market growth.
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Final Thoughts
Knowing when to sell isn't about fear or greed—it's about clarity of purpose. Are you an owner of great businesses or a trader chasing price moves?
If you're buying wonderful companies with durable moats, don't panic at high valuations. But in speculative markets like A-shares, recognize when euphoria takes over—and be ready to act.
Ultimately, your selling strategy should reflect your philosophy, risk tolerance, and goals. Whether you follow Graham, Buffett, or build your own hybrid model, stay consistent—and always think like an owner.
Keywords: when to sell stocks, value investing, stock valuation, extreme overvaluation, P/E ratio, investment strategy, long-term holding, portfolio optimization