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Warren Buffett: when to sell a stock

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close-up photo of investor Warren Buffett
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It’s very easy to buy stocks and shares: Warren Buffett knows that. But when to sell? That’s a much harder question. It’s also one that journalists and writers hardly ever cover. 

Should I sell a stock when it has fallen, to cut my loss? When it has gone up, to lock in a profit? Or should I sell a stock when it has not moved at all, because all my friends are getting rich on meme stocks like AMC or Gamestop

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The Oracle of Omaha has the answer. 

The wisdom of Warren Buffett

At a University of Florida talk in 1998, Warren Buffett gave a room of MBAs some advice that was worth its weight in gold. It’s an apt metaphor, because in the last 23 years, the price of gold has increased from $500 (£350) an ounce to $1,800 (£1,280) an ounce. Holding the precious metal would have nearly quadrupled my money in that time. 

Buffett told the room: “One of the most important things is that a stock doesn’t know you own it. You have all these feelings about it, you remember what you paid, who told you about it. And it doesn’t give a damn.”

Investors spend far too much time worrying about what they paid for a stock. Whether the price moves up, down or sideways from when I bought it? This shouldn’t impact on my decisions at all. 

So when should I sell?

When the story changes

If a business becomes fundamentally less competitive, it might be time to sell, Buffett says. That could happen if my company loses market share to a better rival. Or perhaps if it loses patent-protection for its biggest earner. 

Peter Lynch, author of One Up on Wall Street, offers the same advice as Warren Buffett.

Lynch says: “You can’t get too attached to a stock. You have to understand there is a company behind it. If the company deteriorates and the fundamentals slip, you have to say goodbye to it.” 

When you’re overweight

I’m not having a go at anyone’s waistline, here. Overweight, in this context, means that you have too much money in one single stock. 

Having the courage of one’s convictions is a good thing. And Warren Buffett famously said “diversification is protection against ignorance”.  But in the late-1960s, with $500m under management, Buffett set a limit of 40% in any single stock. When he hit that maximum, he sold some stock.

When a better opportunity appears

For the first 20 years of his investing life, Warren Buffett says his decision on when to sell a stock was “always based on the fact that I found something else I was dying to buy.”

I don’t have infinite cash to invest. By picking one stock to invest in? I’m automatically locking out about five other great ideas. 

Buffett says: The real cost of any purchase isn’t the actual dollar cost. Rather, it’s the opportunity cost—the value of the investment you didn’t make, because you used your funds to buy something else.”

Abandoning a company I really like is a hard decision. But it should come when I’ve found another business I think will give me a better shot at future riches.

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Tom Rodgers has no position in the shares mentioned. The Motley Fool UK has no position in the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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