How Does Charlie Munger Set His Selling Criteria?

At the core of Charlie Munger's investment philosophy are "less is more" and "sit-on-your-ass investing." Consequently, his selling criteria are exceptionally stringent, with his default approach being almost never selling. He believes frequent trading is an investor's worst enemy, generating high transaction costs and taxes while disrupting the magic of compounding.

However, under specific circumstances, Munger will choose to sell. His selling criteria can be distilled into the following core principles, which mirror his buying standards.

Core Principle 1: Permanent Deterioration of Business Fundamentals

This is Munger's most critical reason for selling. He buys a company because he believes it is a great business with a durable competitive advantage (an "economic moat"). If this fundamental premise ceases to exist, the rationale for holding disappears.

Specific manifestations include:

Loss of Competitive Advantage: The company's "moat" is eroded or disrupted. For example, new technologies, business models, or stronger competitors permanently damage the company's market position and profitability.
Deterioration of Management: Management becomes incompetent, dishonest, or starts making poor capital allocation decisions. Munger places immense value on management quality. If a trusted management team is replaced or its actions no longer prioritize shareholder interests, he considers selling.
Bleak Industry Outlook: The entire industry enters structural decline, and even the best companies within it cannot escape.

Summary in one sentence: When the "castle" you originally bought is no longer sturdy or is crumbling, you must leave.

Core Principle 2: Price Becomes Absurdly High (Opportunity Cost Consideration)

Munger is willing to pay a reasonable or even slightly high price for a great company and hold it long-term to enjoy its intrinsic value growth. Therefore, merely being "expensive" does not prompt him to sell. He only considers selling when the stock price rises to an extremely irrational, completely detached from fundamentals, "crazy" level that even discounts decades of future growth.

The core logic for selling in this case is opportunity cost:

Finding a Better Alternative: Selling the wildly overvalued asset to acquire another equally excellent company at a far more reasonable valuation. The expected return of the new opportunity must be significantly higher than the expected return of holding the current asset (especially after deducting tax costs).
Extreme Mismatch in Risk-Reward Profile: When the price reaches a point where the potential downside risk far outweighs the minimal remaining upside potential. Continuing to hold is no longer a sound investment at this stage.

A classic example is Munger and Buffett reducing their holdings in BYD (BYD) during 2021-2022. BYD remained an excellent company, but its market capitalization surged to an extremely high level in a short period. Munger believed its valuation had incorporated overly optimistic expectations, leading to partial sales to lock in profits and reduce opportunity cost.

Summary in one sentence: Consider selling only when the market offers you a price far exceeding your highest estimate of the company's value, allowing you to acquire significantly better assets with the proceeds.

Core Principle 3: Admitting Mistakes and Correcting the Buying Decision

Munger emphasizes intellectual honesty. If, after a period of observation, he realizes his initial buying analysis was flawed, he will decisively sell.

Specific situations include:

Misunderstanding the Business: Misjudging the company's business model or the strength of its competitive advantage.
Misjudging Management: Overestimating management's capabilities or integrity.
Overlooking Key Risks: Failing to identify or underestimating certain critical risk factors during the purchase.

In this case, selling isn't because the company deteriorated, but because it was never as good as you thought it was. Persisting in holding becomes "doubling down on a mistake." The best course is to cut losses immediately and deploy the capital into truly understood and promising opportunities.

Summary in one sentence: When you realize you made a mistake, correct it immediately; don't hold on due to sunk costs or pride.

Core Summary

In summary, Charlie Munger's selling criteria can be framed as answering the following three questions. He initiates a sale only if the answer to one of them is "yes":

【Fundamentals】: Is this company's long-term competitive advantage permanently eroding?
【Opportunity Cost】: Have I found an investment opportunity with significantly higher expected returns (after taxes) and extremely high certainty than the current holding? Or has the current stock price reached an absurd level?
【Cognitive Error】: Did I discover that my initial buying decision was based on a flawed premise?

For Munger, selling is a decision requiring even more careful consideration than buying. His entire system is built on "growing alongside great businesses." Therefore, any thought of selling must undergo extremely rigorous scrutiny. His core idea is: Find great companies, and then the hardest thing to do is "do nothing."