Warren Buffett (Trades, Portfolio)'s right-hand man, Charlie Munger (Trades, Portfolio), is famously a long-term investor. He likes to buy and hold companies, rarely making any changes to the portfolio he managers at the Daily Journal Corp. (DJCO, Financial).
That said, over his career, Munger has sold stocks -- initially, when managing his partnership portfolio before joining Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), and at Berkshire Hathaway alongside Warren Buffett (Trades, Portfolio), as he manages the conglomerate portfolio.
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With this being the case, I thought it'd be interested to look back and see if Charlie has issued any interesting quotes on the topic of selling, as these thoughts might give us some insight into his selling process.
When is the right time to sell?
“We’re partial to putting out large amounts of money where we won’t have to make another decision. If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That’s hard. But if you buy a few great companies, then you can sit on your ass. That’s a good thing.”
As you would imagine, Munger's selling discipline is based on his long-term buying focus. Both Munger and Buffett rarely trade. They only initiate a position when they are confident that they know about the company and its prospects inside out. When they finally move, they move in size, acquiring large positions with no intention ever to sell. They're looking for good companies that can continue to compound shareholder value year after year. The great thing about this strategy is you that you do not have to spend hours trying to assess a company's intrinsic value or trying to work out when is the best time to sell the stock. As long as the business continues to compound, you can hold it for eternity:
“It is occasionally possible for a tortoise, content to assimilate proven insights of his best predecessors, to outrun hares that seek originality or don’t wish to be left out of some crowd folly that ignores the best work of the past. This happens as the tortoise stumbles on some particularly effective way to apply the best previous work, or simply avoids standard calamities. We try more to profits from always remembering the obvious than from grasping the esoteric. It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
This investment style may not generate the same sort of returns as buying the hottest growth stocks, but as Munger and Buffett have proven over their lives, the profits from a simple strategy of buying the market's best compounders and holding them for many decades creates a tremendous amount of wealth over the long run. And not only does this approach achieve impressive returns, but it also minimizes the risk that you as an investor will make a stupid mistake by selling a stock too early or selling a good investment to recycle the cash into a bad one.
Buy the best
Put simply, the best advice from Charlie Munger (Trades, Portfolio) about when to sell a stock is simple: You shouldn't be buying stocks that you might need to sell in the first place. If you buy high-quality compounders and forget about them, they will generate returns year after year, without the requirement for you to spend extra time and effort assessing the intrinsic value or trying to decide when to sell. After all, if you do sell, you've then got to find an equally attractive opportunity, and there just aren't that many good companies out there to choose from. If you've managed to buy shares in one of the best at an attractive price, why bother selling?
Disclosure: The author owns no stock mentioned.
