Investment Notes #27: More Important than Stock Picking (Part 1)
10 August 2025
All stock investors are usually focused on just one question: What to buy? Often, our minds are also preoccupied with another question: Is it the right time to buy?
From my experience, a lot of value can also be created by spending more time on the following two questions:
When to Sell
How much to Buy / Sell
In today’s post, I wanted to share two interesting studies based on real-life experiments that prove the importance of those two questions.
According to a recent research by academics from the University of Chicago and MIT, professional investors are much better at making Buy decisions than at Sells. The researchers analysed 783 real portfolios with an average size of $573mn. The study covered 89 million fund-security-trading dates and 4.4 million high-stakes trades (2.0 and 2.4 million sells and buys, respectively) between 2000 and 2016.
They came to a striking conclusion: “While the investors display clear skill in buying, their selling decisions underperform substantially. Positions added to the portfolio outperform both the benchmark and a strategy which randomly buys more shares of assets already held in the portfolio by over 100 basis points annually per dollar of purchase volume.”
“In contrast, selling decisions not only fail to beat a no-skill random selling strategy, they consistently underperform it by substantial amounts. PMs forgo 80 basis points per year relative to a factor-neutral, random-selling strategy.”
Panel A on the chart below (left-hand side) shows relative outperformance from PM's Buy decisions over various intervals. The right-hand side (Panel B), shows the opposite underpeformance from the Sell decisions. The brackets above the bars represent 95% confidence intervals.
Post-trade returns relative to random Buy and Sell decisions
Source: Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors
Value investors may find it particularly alarming that “underperformance in selling appears most prominently amongst fundamentals-oriented managers who hold more active, concentrated portfolios with higher tracking error. On the other hand, PMs who rely on momentum strategies exhibit the least underperformance in selling.”
The main reason for such poor Sell decisions appears to come from psychology. Investors can spend endless hours looking for the next best idea before pulling the trigger. In contrast, selling is often viewed as raising funds for a new position or after a series of disappointments when investors have mentally ‘checked out’ and want to ‘forget’ about their mistake and move on.
Interestingly enough, decisions made on earnings announcements seem to have no systematic underperformance. So, if investors decide to sell their positions (or open new ones) on the day of earnings release, they will likely make an informed analytical decision. However, selling on other days is more likely to lead to underperformance since investors have no additional information to make their decisions and are more likely to be influenced by human biases.
Other reasons include “extreme performance”. More than 50% of Sell decisions were on stocks that have had extreme performance (either on the upside or downside). This is a non-fundamental driver. In theory, you should not sell a stock just because it is up a lot (or down a lot).
Lack of conviction was also identified as the reason. Investors usually study a stock well before buying it. However, over time, they appear to lose focus on certain stocks in their portfolio, often citing a lack of conviction when deciding to sell a stock. Such low-conviction stocks are usually associated with systematic underperformance.
Conclusion
To improve their performance, investors should spend more time on their Sell decisions.
Taking a fresh look at the Sell candidate is helpful. Analyse it as if it were a new candidate.
Ignore the past performance. In fact, try to avoid selling the biggest losers as they are often the biggest source of future underperformance, according to the study.
Consider selling a position in parts, rather than in one trade.
Refreshing a portfolio can also be helpful. For example, automatic sale of all positions at year’s end. This, however, may increase taxes.
This study reminded me of a great book I read during COVID on different types of investors based on their attitude to losing positions. In The Art of Execution, the author analysed real PMs and concluded that the most successful ones were either cutting their losers very fast (e.g. after 20% loss) or were willing to add to their losing positions to average down. The worst strategy was to do nothing and wait.
In Part 2, I will share more insights on what value investors can do to improve their results beyond the good old fundamental analysis of individual companies.