Warren Buffett (Trades, Portfolio) has often said that he does not want to sell a stock just because it has gone up in value.
Indeed, he has declared there are only two reasons he would sell an equity from his portfolio; either because the investment thesis has changed or because he needs more money for another potential opportunity.
As Berkshire Hathaway's (BRK.A, Financial)(BRK.B, Financial) cash pile has swelled over the past couple of decades, this last point has become less relevant.
However, at the conglomerate's 2006 annual meeting of shareholders, the Oracle of Omaha did remark that he should have sold his investment in Coca-Cola Co. (KO, Financial) when the stock traded up to its highest level in history at the time of the dot-com bubble.
Time to sell
At the 2006 meeting, one shareholder asked Buffett if he could comment on the Coke position seeing as he'd been quiet on the holding while sitting as a member of the company's board.
After stepping down, Buffett was able to be more open about the holding, and he reiterated why he thought the company was a fantastic business:
"Coca-Cola is a fabulous company. Coca-Cola will sell over 21 billion cases of various products β more Coke than anything else β around the world this year, and it goes up every year. It's interesting. The stock in, what, 1997 or '98, whenever it was, sold over $80 a share when the earnings were β I don't remember whether they were $1.50 a share, or something like that β and the earnings then were not as good quality as the earnings are now when, you know, they were $2.17 or something like that. And every year the β you know, they have β they account for a little greater share of the liquids consumed by people in the world. They make fabulous returns on invested capital."
Those were the bull points for the investment, but as Buffett went on to add, the shares became ridiculously overvalued in the late 1990s:
"The stock got to what, in retrospect, clearly was a ridiculous level, but you can't hold the present management, Neville Isdell, responsible for that...So it strikes us as a really wonderful business that sold at a very silly price some years back. And you can definitely fault me for not selling the stock. I always thought it was a wonderful business, but clearly, at 50 times earnings, it was a silly price on the stock. So we like it. We'll own it 10 years from now, in my view."
What is interesting about this comment is that Buffett is clearly saying he might have made a mistake by not selling when the stock was trading at such a high multiple.
However, he also acknowledged the company continues to be a great business, and it should continue to produce good returns for shareholders for the foreseeable future.
When to sell
One of the challenges of investing is deciding when to sell a stock. There is often no red flashing light to tell you when to sell just before the market collapses. More often than not, it is already too late when one realizes that one should have sold.
Buffett is only human. The company's performance since the late 1990s has justified his decision to hold on. We also need to consider the fact that, at the time, there were not many other opportunities to deploy the capital he would have realized by selling the Coke investment. That excludes the potential tax liability.
Trying to understand why he didn't sell reveals more about the investment process than criticizing Buffett for not selling in the first place. He may have admitted a mistake in 2006, but hindsight is wonderful. It is impossible to pinpoint the right moment to sell in the heat of the action.
