Warren Buffett is famous for buying great businesses and holding them for years, sometimes decades. But "buy and hold" doesn't mean "buy and never sell" your ASX shares.
Buffett has demonstrated that investors should be prepared to change their minds when the facts change. For ASX investors, there are three particularly important reasons to consider selling.
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Something better comes along
One of Buffett's most useful ideas is opportunity cost.
You don't necessarily need to think a company is bad to sell it. If you own a decent business but another high-quality blue chip offers substantially better growth prospects, stronger economics or a much more attractive valuation, switching can make sense.
Buffett has done exactly this over the years, exiting businesses when he concluded his capital could be deployed more effectively elsewhere.
The same principle applies to ASX shares. If you own a mature company growing earnings at 4% a year on an expensive valuation, while another excellent business offers significantly better prospects at a similar price, it may be time to reconsider where your money is working hardest.
The economics or business proposition changes
This is arguably the most important reason to sell one of your ASX shares. Buffett doesn't fall in love with a stock ticker. He focuses on the underlying business.
If the competitive advantage disappears, management changes direction, industry economics deteriorate or the company's prospects are fundamentally different from when you bought it, the original investment thesis may no longer apply.
ASX investors have plenty to consider right now. Banks, for example, remain some of Australia's most important companies, but changing mortgage demand, competition and interest-rate expectations can alter the earnings outlook of say Commonwealth Bank of Australia (ASX: CBA).
Energy companies like Woodside Energy Group Ltd (ASX: WDS) provide another example. A company can dramatically change its strategy as commodity prices, capital requirements or the global energy landscape shifts.
The lesson is simple: don't hold a share just because you once loved the story.
When your position size becomes too big
Sometimes the company hasn't done anything wrong — you've simply won too much.
Imagine buying an ASX share that doubles or triples and suddenly represents 35% of your portfolio. The business may still be fantastic, but your portfolio is now heavily dependent on one company.
Buffett has allowed Berkshire Hathaway's biggest investments to become enormous, but individual investors don't have Berkshire's capital base, diversification or financial resources.
Taking some profits from a runaway winner can therefore be sensible risk management. Remember, you can sell a portion without abandoning the investment altogether.
Foolish Takeaway
The Buffett approach isn't really "never sell". It's "know why you own something".
If a better opportunity emerges, the business proposition changes, or one holding becomes too dominant, selling your ASX shares can be just as rational as buying them in the first place.
