Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) second-quarter earnings release, which was published over the weekend, seemed to show that Buffett was a net seller of stocks in the three months ended June 30.
Some investors might be surprised by these actions from a man who's previously said that his favorite holding period is "forever."
However, the fact is, Buffett has been happy to sell stocks in the past whenever the situation for the company in question has changed significantly.
Buffett on selling stocks
Buffett explained the reasoning behind this mentality at the 2009 Berkshire annual meeting of investors. Responding to an audience member who asked, "How do you justify holding stocks forever when the fundamentals have permanently changed?" Buffett said:
"Well, the answer is we don't. You know, and - if we lose confidence in the management, if we lose confidence in the durability of the competitive advantage, if we recognize we made a mistake when we went into it - we sell plenty of times. So it's not unheard of."
Buffett went on to explain that while Berkshire is happy to sell a stock when the group buys a business, "it's for keeps."
That mentality, the Oracle of Omaha continued, helps Buffett and the rest of the group's investment managers maintain a long term investment mentality. "We do think it probably helps us in terms of buying businesses over time," he said.
He also went on to add that there are only two clear reasons why Berkshire would want to sell a company it has acquired for its portfolio:
"And we make only two exceptions: when they promise to start losing money indefinitely or if we have major labor problems."
One thing the group is definitely not going to be doing, Buffett continued, is selling something "just 'cause we get offered more money for it."
Later in the answer, Buffett offered a third reason why he might sell a stock, and that was simply because "if we find something more attractive." He went on to give an example from 2008:
"Normally, we have plenty of money around. But in September of last year, late September, we had committed to put $6.6 billion in Wrigley. We - and then Goldman Sachs (GS, Financial) needed $5 billion, GE (GE, Financial) needed $3 billion. I sold a couple billion dollars' worth of J&J (JNJ, Financial) just because I didn't like getting our cash level down below a certain point, under the circumstances that existed then."
It could be worth keeping these comments in mind both for personal portfolio management purposes and when reviewing Buffett's portfolio choices. The Oracle of Omaha does sell stocks occasionally, but trying to figure out why (unless he has stated the reason clearly) is not a particularly good use of time.
As noted above, there are three reasons why he might sell. This includes selling because something better comes along. With $140+ billion of cash lying around, Berkshire is unlikely to run out of cash any time soon, but that does not mean Buffett will avoid selling if something better comes along.
Portfolio management is somewhat of an art. There's no precise science or formula to find how investors should manage their portfolios. Nevertheless, by taking on board this advice from the Oracle of Omaha, we can try to improve our process.
Selling because something has gone wrong at a business or the investment thesis has changed is one of the hardest things to do. Buffett's ability to be able to change his opinion is one of his best and most underrated qualities.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Warren Buffett: We Think the Very Term 'Value Investing' Is Redundant
- Charlie Munger: It's 'Stupid' to Maximize Returns on Short-Term Money
- Warren Buffett on Investing in Tech and Sector Experience
Not a Premium Member of GuruFocus? Sign up for a
