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.