During the 2002 Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) annual shareholder meeting, Warren Buffett (Trades, Portfolio) was asked to talk about the circumstances in which he sells stocks. This is what he said.
Sell something good to get something great
Selling a stock is not something that Buffett or his partner Charlie Munger (Trades, Portfolio) do often, as is consistent with their "buy-and-hold forever" approach to investing. However, there are two instances in which Buffett thinks an investor pursuing his approach (buying great companies at fair prices) should sell stock. The first is when you find something that is an even better investment than the things you already own:
“We would sell if we needed money for something else, but that has not been the problem the last 10 to 15 years. 40 years ago, my sales were all because I found something that I liked even better. I hated to sell what I sold, but I also didn’t want to borrow money. So I would reluctantly sell something that I thought was terribly cheap to buy something that was even cheaper. Those were the times when I had more ideas than money. Now I’ve got more money than ideas. And that’s a different equation.”
As has been written elsewhere on GuruFocus, Berkshire Hathaway’s enormous pile of cash gives Buffett and his team the ability to buy almost anything they would like. Right now, they are choosing to sit on the sideline (which should perhaps give other investors reason for caution).
Re-evaluation of a business
The second scenario in which a person following the Buffett model might want to sell their stock is if the underlying characteristics of the business have changed, or the larger market that it operates in has altered in some way. When the economic characteristics of the business need to be re-evaluated, that can provide a reason to sell. Crucially, this does not mean these are no longer good businesses - just that they no longer have the kind of competitive advantages that made them a great buy in the past. Buffett provides a few examples of this:
“A classic case of that would be the newspaper industry generally. In 1970s, Charlie and I were looking at the newspaper business and we felt that it was about as impregnable a franchise as could be found. We still think it’s quite a business, but we do not think the franchise in 2002 is the same as it was in 1970. We do not think that the franchise of a network television station in 2002 is the same as it was in 1965. And those beliefs change quite gradually and who knows whether they’re right even. But that is the reason, in general, that we sell now.”
Of course, there is a third case where a sale is warranted, and that is when the original buy was a mistake. This can be considered a subset of the second scenario, as it also involves a re-evaluation (not of the actual business, but of your assessment of it). And although he has been extremely successful, Buffett certainly has made his fair share of mistakes.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Oaktree’s Howard Marks: Investing Capital Conservatively Has Its Limits
- Warren Buffett: Do Not Part With Your Crown Jewels
- Think Like Warren Buffett: Buying Stocks Is Like Buying a House
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