The same logic of disciplined buying applies to disciplined selling. One of the most difficult decisions in investing occurs when a stock has risen enormously. This is where emotion becomes dangerous.
These thoughts can create paralysis. A pre-planned set of criteria can reduce the problem.
For example, an investor may define conditions under which a position will be reduced or sold:
The valuation becomes egregiously extreme relative to conservative intrinsic value.
The expected long-term return falls materially below the portfolio's required return.
The investment thesis deteriorates.
Capital allocation changes.
The balance sheet becomes materially weaker.
Competitive advantages weaken.
Management quality deteriorates, in extreme cases found to be involved in widespread fraud.
Another investment opportunity offers substantially better prospective returns at similar risk.
The point is not that these criteria mechanically determine the correct decision. The point is that they create a framework. They allow the investor to ask “has something fundamental changed?” rather than “how do I feel about today's share price?”
This is especially relevant to the planned exit of a greatly appreciated position such as Micron. Micron's underlying business has unquestionably experienced an extraordinary improvement in financial results during fiscal 2026.
Micron, fiscal Q3 2026
Those numbers demonstrate why a simplistic “AI stock = bubble” argument is inadequate. The company has genuine economics behind the price. At the same time, genuine economics do not eliminate valuation risk.
The relevant question for an existing shareholder is therefore not “is Micron a good company?” It is “given what the market price now reflects, what is my expected long-term return from here under conservative assumptions, and is that return attractive enough relative to the risks?”
That is a much more disciplined selling framework. A pre-planned exit can therefore be rational even when the underlying business remains strong. Selling does not necessarily mean believing that the business will deteriorate. It can mean believing that the prospective return from today's price no longer adequately compensates the portfolio for the risk.
Removing Emotion Does Not Mean Removing Judgment
There is a common misconception that rules make investing mechanical. They do not. Rules are designed to protect judgment from emotional interference.
Suppose a stock rises rapidly. The investor becomes excited. He starts increasing the valuation assumptions. Revenue growth becomes slightly higher. Margins become slightly higher. The terminal growth rate becomes slightly higher. The discount rate becomes slightly lower. Suddenly the spreadsheet justifies the higher price.
This is a subtle form of confirmation bias. The investor has changed the model because the market price changed.
A disciplined process works in the opposite direction. When a stock rises substantially, the investor should become more demanding. When a stock falls substantially, the investor should reassess the fundamentals and potentially become more interested. That sounds simple. Human psychology makes it difficult.
Barber & Odean, "Trading Is Hazardous to Your Wealth," Journal of Finance, April 2000
The implication is not that all trading is bad. The implication is that activity itself is not evidence of skill. A sophisticated investor can make a small number of highly consequential decisions. An inexperienced investor can make hundreds of decisions. The second investor may feel more engaged. That does not mean he is generating more value.
The Discipline of Being Allowed to Miss
Long-term investors need to accept a deeply uncomfortable truth: you cannot own every great company at every stage of its rise.
Missing a stock is not the same as losing money. An investor who refuses to buy an expensive stock has not suffered a capital loss. If the expensive stock appreciates very strongly over the next several years, he or she has suffered an emotional or psychological loss. Those are different.
This distinction is particularly important for quality-value investors. The opportunity set is enormous. Tens of thousands of publicly listed businesses exist around the world. At any given time, some will be:
An investor does not need all of them. He needs a sufficient number of attractive investments where the expected return more than justifies the risk incurred. That is a radically more manageable task.
The goal is not to identify every winner. The goal is to avoid paying excessively for future success and to own businesses capable of creating substantial value over long periods of time, preferably decades.
The Deep Strength of a Long-Only Strategy
A long-only, long-term unleveraged strategy can appear unsophisticated when compared with hedge funds using options, futures, swaps, and other derivatives. In reality, simplicity can be a significant advantage.
A long-only investor can survive periods of irrationality without being forced to close a position at a predefined time. A short position has a potentially painful feature: the stock market can move against you indefinitely. An option has an expiry date, and a leveraged ETF has structural characteristics that make long-term use very different from simply owning the underlying asset. A margin account can force liquidation. A long-only unleveraged owner of the stock of a financially strong company does not face these particular constraints.
That does not make the strategy risk-free. Stocks can fall dramatically, and the businesses behind them can permanently lose value, where business quality can deteriorate, and valuations can remain depressed for years.
The long-term investor can exit these losing positions decisively, actualise the loss, and redeploy the capital into stocks of great compounders trading at fair prices or exceptional companies trading at cheap prices, more than making up for the loss in the losing stock and making strong returns over the long term.
This is called “cutting the losers and watering the winners” — the inverse of what portfolio manager Peter Lynch described as investors “cutting the flowers and watering the weeds.”
The long-term investor has time, which is a strategic asset.
Patience Is a Financial Advantage
Suppose an investor believes a great company is worth $100 and buys at $70. The stock then falls to $40.
Keeps checking stock prices of the portfolio's components, focuses on short-term price movements, may think the thesis has failed, and sells out.
Thinks the thesis is now being tested, and looks intensely through earnings calls, analyst forecasts, quarterly and annual reports to reassess competitive position before deciding to hold, sell, or add.
“Time in the market” is more useful when it is understood properly. Time alone does not create wealth. Time allowing exceptional and great businesses to compound retained earnings and free cash flow will create great wealth over an investor's lifespan.
The investor must therefore own businesses whose economics justify patience. Patience works best when combined with business quality and sensible valuation, which ensures that the portfolio's downside is managed well.
The Portfolio Should Become More Robust as the Stock Market Becomes More Excitable
This principle can be stated simply: the more uncertain the stock market's future becomes, the less dependent a portfolio should be on one or two sectors that are very popular with market participants currently.
Suppose the dominant market narrative is “AI spending will remain enormous for the next decade.” An investment portfolio that requires this statement to be true is fragile. A more diversified portfolio will contain:
And other exceptional and great businesses with different economic drivers. Now the portfolio does not require one narrative to be true.
Some companies benefit from AI and technology investment. Others benefit from demographic demand. Others benefit from recurring consumer spending. Others benefit from financial market activity. Others generate cash with comparatively little dependence on economic growth.
This does not eliminate systematic risk — that is unavoidable, cannot be eliminated, and comes directly from investing in financial markets — although it reduces sector narrative concentration. That distinction is important.
Diversification is often criticised by some institutional investors who make an assertive statement that if you are a highly skilled investor, you should have a very concentrated investment portfolio of fewer than 10 stocks. They have valid arguments based upon a sound premise that is very valid to their situation, but the vast majority of retail investors are very highly emotionally vulnerable during a highly volatile stock market environment.
For the vast majority of retail investors, having a very concentrated investment portfolio with fewer than 10 stocks — which will result in much higher portfolio volatility than stock market indexes — will lead to numerous cognitive biases coming into play, resulting in many retail investors making the worst decisions during the worst times in financial markets.
The purpose of diversification is to construct a portfolio that can survive the investor being wrong.
The Anti-Bubble as a Source of Portfolio Resilience
This is why anti-bubble investments can have a role beyond adjusting the overall valuation of an investment portfolio. They can provide a balance between sectoral and regional concentration and underlying currency exposure.
Imagine a portfolio heavily exposed to a single high-growth narrative theme. That portfolio can perform extremely well when the narrative theme expands and continues to dominate investors' discourse and financial media attention. But its downside becomes highly dependent on the same narrative theme.
Adding very undervalued, exceptional, and great companies from boring or unfavoured industries changes the investment portfolio's risk-return profile and economic structure.
The goal is to create an investment portfolio where different holdings generate value for different reasons during different periods of time, when a sector is highly favoured by the stock market before the inevitable sector rotation occurs that leads to another sector being favoured by the stock market.
That is a much more durable foundation for long-term capital.