It’s no secret to anyone that Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) likes to buy and hold stocks for protracted periods of time. But there are situations in which the Oracle of Omaha decides to sell his holdings. When asked about his decision-making process at a Q&A, this is what he said.
Working with small sums is different to large ones
Buffett begins by acknowledging that selling is a more difficult decision than buying:
“That’s a tougher question than when to buy. Originally, when I was working with tiny sums, I always had way more ideas than I had money. I had a portfolio, a very limited dollar amount, and I would find something that was more attractive -- and which I felt I knew as much about - but was more attractive by a significant margin than something that I held. So I would sell something I held to buy something more attractive, never raising cash. And I was always selling things that were still cheap, because it was a market where there were a lot of things that were really cheap, and I was looking for the cheapest among things that I understood.”
So when he was managing more modest sums, he had to sell some good positions to take on even betters ones. Truth be told, having to choose between multiple great investment ideas is a good problem to have. Nowadays, Buffett finds himself in a position where he has much more capital than opportunities to deploy it:
“Over the years, as more and more capital has accumulated for which I am responsible, frequently my money outruns my ideas. So now, the only reason that I would sell something would be if I lost confidence in the business, or the management, or it became dramatically overpriced. That doesn’t happen very often. We work with very large quantities of stock, so it’s not an easy in-and-out type proposition.”
The rare exception
Buffett is only human, and occasionally he makes mistakes - about the economics of the business, or about the capabilities of the management. In these cases, he sells. But ten years ago he also found himself in a similar position to the one he often found himself in during his earlier years:
“During the panic in the fall of 2008, I was already committed to help the Mars family buy Wrigley that was $6.5 billion dollars - I bought the Goldman preferred for $5 billion and then General Electric came along and they wanted $3 billion. I wasn’t comfortable committing $3 billion more at that time - we had the money, but I like to leave a big margin of safety. So as part of that same transaction, I sold roughly $1.5 billion of Johnson & Johnson stock.
I wasn’t selling it because I thought there was anything wrong with Johnson & Johnson, I just felt that the General Electric preferred was more attractive and I didn’t want to leave myself in a position where I wasn’t comfortable with the cash position that I would have had if I hadn’t have sold. So that was the rare case where even under current circumstances that I sold something that I regarded as still attractive to buy something even more attractive - that’s not usually the case.”
Disclosure: The author owns no stocks mentioned.
