Warren Buffett: The 3 Times When You Should Sell a Stock

Summary

The video discusses Warren Buffett's advice on when to sell a stock. Don't sell based on the purchase price or temporary ups and downs. Instead, sell when you find a more compelling investment opportunity, when the business fundamentals deteriorate substantially, or when a single stock becomes too large a percentage of your portfolio. The video analyzes real examples of Buffett selling for these reasons. It argues that while Buffett now prefers to hold companies forever, earlier in his career he readily sold to redeploy capital into better investments.

Takeaways

• 😀 Don't let your purchase price impact your decision to sell a stock. The stock doesn't know or care what you paid for it.
• 👍🏻 Sell a stock when you find a more attractive investment opportunity to put your capital to work in.
• 💡 Sell when something fundamental changes about a company's business or economic characteristics in a major negative way.
• 📉 Sell to cut your losses if you've lost conviction in management or the business model.
• �🔻 Sell if a single stock position gets too large relative to the overall portfolio.
• 😥 Don't sell great companies just because of temporary scary news.
• 🤝 Buffett doesn't sell wholly-owned businesses now because of his loyalty and relationships with managers.
• 💰 Buffett used to readily sell controlled businesses in the past when better opportunities arose.
• ⚖️ There's a small 'do nothing' zone between wanting to buy more and needing to sell.
• 📚 Good selling decisions come from knowing what makes a good buy decision in the first place.

Q & A

What are the three main situations Buffett says you should sell a stock?

1) When you find something better to invest in, 2) When the fundamental economics of the business change significantly, 3) When a single stock position gets too large in your portfolio.

Why does Buffett say it's a mistake to focus too much on the price you originally paid for a stock when deciding whether to sell it?

Because the stock price moves independently of what you paid for it in the past. You need to evaluate it based on its current price and value.

What's an example of Buffett selling a stock when he found something better to invest in?

In 1959 he sold his stake in Commonwealth Trust bank to buy shares in Sanborn Maps, because Sanborn was relatively more undervalued.

What are some examples of times Buffett has sold a stock because the business fundamentals changed significantly?

He sold his airline stocks in 2020 due to COVID-19, he sold The Washington Post newspaper in 2014 as he felt print newspapers were in structural decline, and he sold his stake in UK grocery chain Tesco after getting discouraged with management.

What percentage of his partnership's assets did Buffett have invested in American Express in 1967?

He had 40% of his partnership's assets in American Express in 1967.

When does Buffett say you should consider trimming a stock position even if you still want to own some shares in the company?

When it gets too large as a percentage of your overall portfolio, over around 40% for most investors.

What 'zone' does Buffett talk about where you wouldn't necessarily sell a stock, but you also wouldn't be buying more shares?

The 'do nothing' zone - where the stock no longer looks attractive enough to buy more of, but you still want to hold your existing shares.

What key question does Buffett say you should ask when deciding whether to sell a stock you currently own?

"If I didn't already own the stock, would I want to buy it today at the current valuation?"

Why does Buffett say selling a stock has some disadvantages compared to just not buying any more shares?

Because selling incurs taxes on your capital gains as well as transaction costs.

What are the main things Buffett looks for when deciding to buy a stock?

An attractive, undervalued price, good long-term business fundamentals and economics, and competent, shareholder-friendly management.

Outlines

00:00

😊 Deciding when to sell a stock based on Warren Buffett's advice

Paragraph 1 discusses the confusion around deciding when to sell a stock. It mentions common reasons like securing a profit, cutting losses, or flat growth. However, Warren Buffett advises not to focus on the purchase price. Instead, he provides three practical situations when it's time to sell: 1) Finding a better investment opportunity 2) Fundamental business changes 3) A single holding gets too large in your portfolio.

05:02

😎 Two key time periods showing evolution in Buffett's selling philosophy

Paragraph 2 highlights two time periods demonstrating shifts in Buffett's perspectives on selling businesses. Earlier on, he readily sold companies to pursue better returns. Later, he valued long-term relationships and didn't sell just because someone offered more money, likening it to selling his children.

10:03

🤔 Buffett's 3 recommended situations when investors should sell stocks

Paragraph 3 summarizes Buffett's three recommendations for when to sell stocks: 1) When you find a better investment 2) When business economics fundamentally change 3) When a single stock becomes too large a percentage of your portfolio. It emphasizes evaluating each stock independently, rather than relying on purchase price. The paragraph concludes by previewing Buffett's stock buying criteria.

Keywords

💡Selling stocks

The main theme of the video is providing guidance on when to sell your stocks, drawing on wisdom from renowned investor Warren Buffett. It outlines 3 key situations when Buffett would sell a stock: 1) When you find a better investment opportunity i.e. "something else I was dying to buy", 2) When the fundamental economics of a business changes significantly, 3) When a single stock holding gets too large.

💡Opportunity cost

The concept of opportunity cost is mentioned - the idea that putting your money in one stock means you cannot put that same money into another potentially more attractive stock. This relates to the first reason Buffett gives for selling a stock - to free up capital for other more compelling opportunities.

💡Permanent ownership

Buffett says he has a preference nowadays for permanent ownership of controlled businesses rather than constantly buying and selling them. However, this contradicts his earlier strategy of buying undervalued stocks and selling when fairly valued. The video argues smaller investors should still follow the latter strategy of realising gains.

💡Changed economics

One of Buffett's sell signals is when the fundamental economics of a business changes significantly e.g. he sold his airline stocks in 2020 due to COVID-19's impact. Other examples are newspapers facing industry decline and issues with Tesco's management.

💡Too concentrated

Buffett advocates a concentrated portfolio, but will cut down a stock holding if it gets too large as a percentage of the overall portfolio - to avoid having all your eggs in one basket. At one point 40% of his partnership was invested in American Express.

💡Tax implications

The video notes there is a gap between wanting to buy more of a stock and wanting to sell it completely. This is because selling incurs tax obligations and transaction costs, so sometimes it is better to just hold.

💡Purchase price

Buffett says the purchase price you paid for a stock shouldn't influence your decision to sell - "the stock does not know you own it". The key question is if you would still buy the stock again today at the current price.

💡Cut losses

One question asked is should you sell a stock that has fallen in value to "cut your losses short". But Buffett says the price movement itself should not drive sell decisions unless business fundamentals have worsened.

💡Relationships

For his wholly owned businesses, Buffett now prioritises preserving relationships with trusted managers over maximising investment return through buying/selling.

💡Scary news

Buffett warns against selling quality companies purely due to negative market news - "Selling fine businesses on scary news is usually a bad decision".

Highlights

The first situation when Warren Buffett wants to sell is when something better shows up.

If you put money in one stock, you cannot put that same money in another stock. This sometimes makes for tough decisions.

Today, Buffett wouldn’t sell his wholly-owned businesses even if he expects sub-par returns. His preference is for the relationships with managers.

For smaller investors, Buffett would likely suggest selling when undervaluation is corrected in order to reinvest the capital.

Another sell situation is when the economic characteristics of a business change in a major way.

Buffett recently sold airline stocks because "the world has changed for airlines" due to coronavirus.

Buffett sold The Washington Post newspaper in 2014 noting the world had changed for newspapers.

Buffett sold grocery chain Tesco mainly over issues with management.

Fundamental business changes that warrant selling are quite rare, Buffett says.

Another sell situation is when a single stock holding gets too big, over 40% of the portfolio.

The question to ask: "If I didn’t already own the stock, would I want to buy it today?" If not, sell.

There's a "do nothing" zone between wanting to buy more and needing to sell.

Sell if you've found something better, if something fundamental changes, or a holding gets too large.

Focus should be on the business prospects, not the original purchase price.

Wanting to keep and wanting to buy more of a stock are closely related but have a gap due to taxes and costs.

Transcripts

The decision to sell a stock can be rather confusing.

Do you sell it because it has gone up, to secure a profit?

Do you sell it because it has gone down, you know, cut your losses short?

Or perhaps you should sell it because it has been flatlining

while all your friends are getting rich on bitcoin?

Luckily, Warren Buffett, the oracle of Omaha and the sage of securities, has got us covered

on this subject.

The world’s greatest investor has discussed the art of selling during quite a few different occasions.

In this video, you’ll learn three practical situations in which it is time to sell

your stock market holdings – Warren Buffett style.

By the way, if you’ve only heard what Warren Buffett has had to say on this topic more recently

you are probably doing it wrong.

This is the Swedish Investor, bringing you the best tips and tools for reaching financial freedom

through stock market investing.

Before getting into the three situations which should have you sell a stock,

let’s first discuss why the character in the intro does his selling all wrong.

It’s because he is focusing too much on what he paid.

Buffett says this:

Yeah, one of the important things in stocks is that the stock does not know that you own it.

You have all these feelings about it.

You remember what you paid.

You remember who told you about it.

All these little things, you know?

And it — you know, it doesn’t give a damn.

It just sits there.

And it — you know, a stock at 50, somebody’s paid 100, they feel terrible.

Somebody else paid 10, they feel wonderful.

All these feelings, and it has no impact whatsoever.

Okay, so if the fact that a stock has gone up, down or is just moving sideways

shouldn’t have any impact whatsoever on your selling decision, then what should?

The first situation when Warren Buffett wants to sell is this:

When something better shows up

The first 20 years of investing for me — or maybe more

my decision to sell almost always was based on the fact that I found

something else I was dying to buy.

I mean, I sold stocks at — you know, at three times earnings to buy stocks at two times earnings

You know that I love to talk about opportunity costs.

If you put money in the shares of company A,

you cannot put that same money in shares of company B.

This sometimes makes for some tough decisions; you may have to abandon a company

that you really like for something which is even more terrific.

Here’s an example from his 1959 letter to partners in Buffett Partnership Limited,

when Buffett switched his position in a bank called Commonwealth Trust

into the mapping business of Sanborn Maps

Late in the year, we were successful in finding a special situation

where we could become the largest holder at an attractive price,

so we sold our block of Commonwealth obtaining $80 per share …

I might mention that the buyer of the stock at $80 can expect to do quite well over the years.

However, the relative undervaluation at $80 with an intrinsic value $135 is quite different

from a price of $50 with an intrinsic value of $125, and it seemed to me that our capital

could better be employed in the situation which replaced it.

Here’s where you may have gone wrong with your selling if you’ve listened to

the more recent advise from Warren Buffett.

Today, he wouldn’t sell his wholly-owned businesses EVEN IF he expects them to deliver

sub-par investment returns.

It is a little bit misleading to listen to the advice that Warren Buffett’s favourite holding period is “forever”.

Holding forever is just a personal preference of his these days,

he prioritizes the personal relationships he’s been able to build up with the managers of the subsidiaries

at Berkshire Hathaway more than making a few extra percentages of returns.

To break of relationships with people that I like, and people that have joined me because

they think it is a permanent home [Berkshire] – to do that simply because somebody waves

a big check at me would be like selling one of my children because someone waves a big check

so I won’t do that.

And I want to tell my partners I won’t do it so that they are not disappointed with me.

The Berkshire Hathaway “Owner’s Manual” was first presented in an annual shareholder letter

to Berkshire shareholders back in 1983, but this thinking of Buffett’s goes further back than that.

Have a look at what he said in a partnership letter from 1968:

As I have mentioned before, we cannot make the same sort of money out of permanent ownership

of controlled businesses that can be made from buying and reselling such businesses,

or from skilled investment in marketable securities.

Nevertheless, they offer a pleasant long-term form of activity

(when conducted in conjunction with high grade, able people)

at satisfactory rates of return.”

Buffett’s preference for reselling businesses started to change after an experience with

Dempster Mill Manufacturing in the early 1960s.

A whole town pretty much hated Buffett for buying their largest employer and then slashing

down costs and jobs, in order to make it profitable for a sell.

However, if we look at his partnership letter from 1961, when he also operated with less capital

we’ll see what I suspect that Buffett would suggest us smaller investors to do:

Our bread-and-butter business is buying undervalued securities and selling when the undervaluation is corrected.

It’s not personal Sonny.

It’s strictly business.

Another situation in which Warren Buffett would sell a stock is this:

When the economic characteristics of a business change in a major way

Our inclination is not to sell things, unless we get really discouraged perhaps with the management,

or we think the economical characteristics of the business changed in a big way.

And, I mean, that happens.

Let’s look at a few examples of major changes which have caused Warren Buffett to sell historically:

Just recently, in 2020, he sold his stakes in a few of the major airline companies,

noting that “the world has changed for airlines” due to the coronavirus.

In 2014, Buffett sold off one of his most important investments of all time

the newspaper The Washington Post.

During many years, Buffett talked about how the world had changed for newspapers,

and that The Post didn’t possess nearly the same competitive advantages

as when Berkshire purchased it in 1973.

Finally, he decided to cut it loose.

Then there is Buffett’s investment in the grocery chain Tesco.

Buffett doesn’t specify why, but he had an issue with the management of this company,

which was the reason for him selling his piece of the business in the end.

He was out of the position by 2014, realizing a small net loss.

On a more personal note, one of my own worst investing selling mistakes

could perhaps have been avoided had I know about this a few years ago.

I used to own a Swedish beverage company called Kopparbergs,

which had more than half of its revenues in Great Britain.

In July 2016, Britain voted to leave the EU, complicating trade with other EU countries.

One could argue that I should have sold back then, instead of, you know … later.

It’s done!

However, I may mention this:

Fundamental changes happen quite rarely.

In his annual letter to Berkshire Hathaway shareholders from 1997, Buffett hints this

when he says that:

Selling fine businesses on "scary" news is usually a bad decision.

Finally, Buffett is all for a concentrated portfolio, and you know that I am too,

but a situation when you must also sell, or, well, cut down, is this:

When a single holding gets too big

Yes, the age-old advice of not putting all your eggs in one basket is true,

but you don’t have to be as strict as most people suggest.

The smaller your portfolio is, the more you can afford to put in a single stock.

Consider that Warren Buffett had 40% of his partnership’s money in American Express in 1967,

when he was managing more than today’s equivalent of $500m.

The stock eventually took him over this 40% limit rule,

and he cut down on his position to maintain some sort of diversification.

By the way, American Express is just the 4th largest commitment that Warren Buffett has ever made.

Again, the person in the intro of this video is wrong because he focusses on the purchase price.

A stock doesn’t give a damn what you paid for it.

A useful question to ask is the following:

If I didn’t already own the stock, would I still want to make the investment today?

If not, then you should probably sell.

Wanting to keep a stock and wanting to buy more of it are not the exact same thing,

but they are closely related.

They are not the same because selling a stock to buy something else is associated with having

to pay taxes on your profits and additionally, it will incur transaction costs.

Therefore, there’s a small gap between the “buy more”-zone and the “sell”-zone.

This could be called the “do nothing”-zone,

a highly underestimated zone in today’s world of investing.

Sell a stock if you’ve found something better,

if something fundamental has changed,

or if a single holding gets too large.

Now you know the selling part.

If you want to know what Warren Buffett is looking for when he is buying a stock,

here’s a long video with lots of meat for you.

Here, you’ll learn about the 25 most important investments of Warren Buffett of all time.

You’ll learn what these investments looked like at the time of purchase.

Cheers guys, hope to see you again real soon!