Holding on to Great Stocks

One of the biggest mistakes you can make as an investor is selling a great stock just because it has increased in value. In this short article, I want to walk you through why holding onto a great stock is often the better move.

Now, if you’re not part of the Retail Investor’s Hub community yet, let me first clarify what I mean by a “great stock.” Opinions on this can vary widely, but for us, a great stock is backed by a business that has three key characteristics:

1. Consistently growing earnings and free cash flow (FCF).
2. A high return on invested capital (ROIC).
3. A durable competitive advantage, or what’s often called a "moat."

If you’ve invested in a business with these characteristics, there’s rarely a reason to sell—unless the company’s moat starts to shrink. Here’s why:

Imagine you bought into a business at $5 per share, and within two years, the stock price jumps to $20 per share—a 300% return in just two years. Naturally, you might feel tempted to sell, thinking it’s now overpriced. And while that rationale might seem logical, it’s not a good enough reason to sell.

That logic applies to someone looking to buy the stock now at $20. For them, it might not be a great deal anymore. But as someone who bought in at $5, selling isn’t the best move. Sure, the stock may not triple as quickly again—from $20 to $60—but it can still deliver strong returns for you as an early investor.

Let’s break it down further. Suppose the stock rises from $20 to $30 per share over the next five years. For an investor who bought in at $20, that’s a 50% return, or roughly an 8.5% compound annual growth rate (CAGR).

But for the investor who purchased the stock at $5 per share, that same increase from $20 to $30 represents an additional 200% return—significantly more than the 50% return for the later buyer.

The takeaway here is simple: if you own a great business, don’t sell it—even if the market considers it overvalued.

Charlie Munger has a great analogy when it comes to great businesses:

“Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result.”

To wrap things up, the only time you should consider selling a stock is if the fundamentals of the business start to deteriorate, or it begins to lose its competitive edge. Otherwise, if the business is truly great, the longer you hold it, the better your results will be. Patience and consistency are the keys to maximising your returns.