The decision to sell a stock can be rather confusing.
Do you sell it because it has gone up, to secure a profit?
Do you sell it because it has gone down, you know, cut your losses short?
Or perhaps you should sell it because it has been flatlining
while all your friends are getting rich on bitcoin?
Luckily, Warren Buffett, the oracle of Omaha and the sage of securities, has got us covered
on this subject.
The world’s greatest investor has discussed the art of selling during quite a few different occasions.
In this video, you’ll learn three practical situations in which it is time to sell
your stock market holdings – Warren Buffett style.
By the way, if you’ve only heard what Warren Buffett has had to say on this topic more recently
you are probably doing it wrong.
This is the Swedish Investor, bringing you the best tips and tools for reaching financial freedom
through stock market investing.
Before getting into the three situations which should have you sell a stock,
let’s first discuss why the character in the intro does his selling all wrong.
It’s because he is focusing too much on what he paid.
Buffett says this:
Yeah, one of the important things in stocks is that the stock does not know that you own it.
You have all these feelings about it.
You remember what you paid.
You remember who told you about it.
All these little things, you know?
And it — you know, it doesn’t give a damn.
It just sits there.
And it — you know, a stock at 50, somebody’s paid 100, they feel terrible.
Somebody else paid 10, they feel wonderful.
All these feelings, and it has no impact whatsoever.
Okay, so if the fact that a stock has gone up, down or is just moving sideways
shouldn’t have any impact whatsoever on your selling decision, then what should?
The first situation when Warren Buffett wants to sell is this:
When something better shows up
The first 20 years of investing for me — or maybe more
my decision to sell almost always was based on the fact that I found
something else I was dying to buy.
I mean, I sold stocks at — you know, at three times earnings to buy stocks at two times earnings
You know that I love to talk about opportunity costs.
If you put money in the shares of company A,
you cannot put that same money in shares of company B.
This sometimes makes for some tough decisions; you may have to abandon a company
that you really like for something which is even more terrific.
Here’s an example from his 1959 letter to partners in Buffett Partnership Limited,
when Buffett switched his position in a bank called Commonwealth Trust
into the mapping business of Sanborn Maps
Late in the year, we were successful in finding a special situation
where we could become the largest holder at an attractive price,
so we sold our block of Commonwealth obtaining $80 per share …
I might mention that the buyer of the stock at $80 can expect to do quite well over the years.
However, the relative undervaluation at $80 with an intrinsic value $135 is quite different
from a price of $50 with an intrinsic value of $125, and it seemed to me that our capital
could better be employed in the situation which replaced it.
Here’s where you may have gone wrong with your selling if you’ve listened to
the more recent advise from Warren Buffett.
Today, he wouldn’t sell his wholly-owned businesses EVEN IF he expects them to deliver
sub-par investment returns.
It is a little bit misleading to listen to the advice that Warren Buffett’s favourite holding period is “forever”.
Holding forever is just a personal preference of his these days,
he prioritizes the personal relationships he’s been able to build up with the managers of the subsidiaries
at Berkshire Hathaway more than making a few extra percentages of returns.
To break of relationships with people that I like, and people that have joined me because
they think it is a permanent home [Berkshire] – to do that simply because somebody waves
a big check at me would be like selling one of my children because someone waves a big check
so I won’t do that.
And I want to tell my partners I won’t do it so that they are not disappointed with me.
The Berkshire Hathaway “Owner’s Manual” was first presented in an annual shareholder letter
to Berkshire shareholders back in 1983, but this thinking of Buffett’s goes further back than that.
Have a look at what he said in a partnership letter from 1968:
As I have mentioned before, we cannot make the same sort of money out of permanent ownership
of controlled businesses that can be made from buying and reselling such businesses,
or from skilled investment in marketable securities.
Nevertheless, they offer a pleasant long-term form of activity
(when conducted in conjunction with high grade, able people)
at satisfactory rates of return.”
Buffett’s preference for reselling businesses started to change after an experience with
Dempster Mill Manufacturing in the early 1960s.
A whole town pretty much hated Buffett for buying their largest employer and then slashing
down costs and jobs, in order to make it profitable for a sell.
However, if we look at his partnership letter from 1961, when he also operated with less capital
we’ll see what I suspect that Buffett would suggest us smaller investors to do:
Our bread-and-butter business is buying undervalued securities and selling when the undervaluation is corrected.
It’s not personal Sonny.
It’s strictly business.
Another situation in which Warren Buffett would sell a stock is this:
When the economic characteristics of a business change in a major way
Our inclination is not to sell things, unless we get really discouraged perhaps with the management,
or we think the economical characteristics of the business changed in a big way.
And, I mean, that happens.
Let’s look at a few examples of major changes which have caused Warren Buffett to sell historically:
Just recently, in 2020, he sold his stakes in a few of the major airline companies,
noting that “the world has changed for airlines” due to the coronavirus.
In 2014, Buffett sold off one of his most important investments of all time
the newspaper The Washington Post.
During many years, Buffett talked about how the world had changed for newspapers,
and that The Post didn’t possess nearly the same competitive advantages
as when Berkshire purchased it in 1973.
Finally, he decided to cut it loose.
Then there is Buffett’s investment in the grocery chain Tesco.
Buffett doesn’t specify why, but he had an issue with the management of this company,
which was the reason for him selling his piece of the business in the end.
He was out of the position by 2014, realizing a small net loss.
On a more personal note, one of my own worst investing selling mistakes
could perhaps have been avoided had I know about this a few years ago.
I used to own a Swedish beverage company called Kopparbergs,
which had more than half of its revenues in Great Britain.
In July 2016, Britain voted to leave the EU, complicating trade with other EU countries.
One could argue that I should have sold back then, instead of, you know … later.
It’s done!
However, I may mention this:
Fundamental changes happen quite rarely.
In his annual letter to Berkshire Hathaway shareholders from 1997, Buffett hints this
when he says that:
Selling fine businesses on "scary" news is usually a bad decision.
Finally, Buffett is all for a concentrated portfolio, and you know that I am too,
but a situation when you must also sell, or, well, cut down, is this:
When a single holding gets too big
Yes, the age-old advice of not putting all your eggs in one basket is true,
but you don’t have to be as strict as most people suggest.
The smaller your portfolio is, the more you can afford to put in a single stock.
Consider that Warren Buffett had 40% of his partnership’s money in American Express in 1967,
when he was managing more than today’s equivalent of $500m.
The stock eventually took him over this 40% limit rule,
and he cut down on his position to maintain some sort of diversification.
By the way, American Express is just the 4th largest commitment that Warren Buffett has ever made.
Again, the person in the intro of this video is wrong because he focusses on the purchase price.
A stock doesn’t give a damn what you paid for it.
A useful question to ask is the following:
If I didn’t already own the stock, would I still want to make the investment today?
If not, then you should probably sell.
Wanting to keep a stock and wanting to buy more of it are not the exact same thing,
but they are closely related.
They are not the same because selling a stock to buy something else is associated with having
to pay taxes on your profits and additionally, it will incur transaction costs.
Therefore, there’s a small gap between the “buy more”-zone and the “sell”-zone.
This could be called the “do nothing”-zone,
a highly underestimated zone in today’s world of investing.
Sell a stock if you’ve found something better,
if something fundamental has changed,
or if a single holding gets too large.
Now you know the selling part.
If you want to know what Warren Buffett is looking for when he is buying a stock,
here’s a long video with lots of meat for you.
Here, you’ll learn about the 25 most important investments of Warren Buffett of all time.
You’ll learn what these investments looked like at the time of purchase.
Cheers guys, hope to see you again real soon!