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For many investors, the hardest part of investing isn't deciding which stocks to pick – it's knowing when to sell. Should you sell after a stock has gone up a certain amount? After it has gone down a certain amount? When an analyst downgrades it? When it misses earnings expectations?

The great Warren Buffett has a simple answer to the when-to-sell conundrum: He says his favourite time to sell a stock is, well, never.

Consider what Mr. Buffett wrote in his 1988 letter to Berkshire Hathaway shareholders:

"In fact, when we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behaviour to cutting the flowers and watering the weeds."

To Mr. Buffett, stellar businesses are steady, reliable compounding machines, and he would rather hold onto one of them forever than try to make a profit by jumping in and out of other less worthy stocks at the right times. But that doesn't mean Berkshire won't ever sell a stock. Every quarter, the company makes some adjustments to its holdings – sometimes extremely significant changes. For example, in last year's fourth quarter, Berkshire sold off its entire 41-million-share stake in Exxon Mobil as tumbling oil prices caused a major shakeup in the oil industry's outlook. Exxon had been Berkshire's eighth-largest position, but the firm cut bait after only about a year and a half.

When Mr. Buffett and Berkshire do sell, however, it doesn't seem to be because they are looking to make a quick gain or because a short-term fear has arisen. Instead, it's because the conditions that led to their initial bullish thesis have changed. Generally, that's what I do with the Buffett-inspired model portfolios I track, though the way I put that idea into practice differs significantly from how Mr. Buffett operates. I reassess my main 10-stock Buffett portfolio's holdings – which are picked using a quantitative strategy that is based on a published version of Mr. Buffett's approach – every month to see if their fundamentals and financials are holding up. My belief is that if you buy a stock because it has, say, a low price-to-earnings ratio, high return on equity and low long-term debt, you should unload it if and when it no longer has those qualities – be it a month from now or 10 years from now. So each month, I remove any stocks whose fundamentals no longer put them among the highest scorers on my Buffett-based model, and replace them with those whose fundamentals do.

In addition to my monthly rebalanced 10-stock Buffett-inspired portfolio, I also track Buffett-based portfolios that are rebalanced quarterly and annually. Interestingly, the monthly version has produced the best returns, beating the quarterly option by 2.2 percentage points a year and the annual version by

1 percentage point a year. A 20-stock, monthly rebalanced Buffett portfolio I track has also beaten its quarterly and annually rebalanced peers.

Now, rebalancing frequencies certainly affect trading costs, which affect your net returns, and the model portfolios I track do not include trading fees (or dividends). There are tax implications to more frequent trading, too. But the monthly rebalanced 10-stock Buffett portfolio has been far from a rapid-fire trading vehicle. Several of its recent holdings were in the portfolio for more than a year, one since October, 2012, in part because the strategy – which looks for a decade of persistent earnings growth, a decade of strong returns on equity and a decade of strong returns on retained earnings – is not easily swayed by short-term events.

That being said, it does appear that having the ability to more frequently ditch stocks whose fundamentals deteriorate rapidly, and the ability to shift from one "Buffett-type" stock to another that is cheaper, have added value to the monthly rebalanced portfolios.

I'm not saying Mr. Buffett should be rebalancing Berkshire's portfolio every month. His $100-billion (U.S.) portfolio presents logistical challenges that individual investors don't have to deal with. The key point is that quickly ditching a stock whose underlying fundamentals change for the worse doesn't make you a bad long-term investor. Good long-term investors sell a stock when the reasoning used to buy it no longer holds up, regardless of how long they held the stock.

On the other hand, selling a stock when it has a bad month in terms of price performance, or when scary headlines about it surface, or when it reaches a certain price target, are all ways in which you allow emotion and cognitive biases to enter your investment process. Far more often than not, that leads to trouble over the long haul.

John Reese is CEO of and Validea Capital, and portfolio manager for the National Bank Consensus funds. Globe Investor has a distribution agreement with, a premium Canadian stock screen service. Try it today and get the exclusive Globe & Mail user discount.

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