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How does Warren Buffett decide when to sell a stock?

Warren Buffett has been investing for a long time. From buying his first shares at 11 years-old, to learning his trade with the investment guru Benjamin Graham, he has been buying and selling stocks for 78 years.

A lot has been written about what the Sage of Omaha looks for when he is buying shares in a company. Often it is noted that his favourite holding period is forever. He certainly evaluates a business with a long-term horizon and ignores how the market values his companies on a day-to-day basis. 

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Buying the farm

In the past, he has likened buying shares in a company to purchasing a farm. A buyer would look at the yield from the crops, the price they are paying for the land, the opportunity the land could bring over the next 10 years or so, and then evaluate whether or not they are getting a good deal. They probably wouldn’t ask someone to come round each morning to tell them what the price of the land is.

When looking at what would make Buffett sell a share, it’s important to note what makes him buy stocks in the first place. I think that fundamentally there are three things that he looks for when buying: 

  • The company must have a competitive advantage
  • The business must have good management
  • The stock should be trading at a price below its intrinsic value

It stands to reason then, that Buffett would normally only sell if one of these fundamentals should change. I don’t think he would sell just because of market noise, or if the price of the stock fell, unless something material to the business altered. Let’s take a look at one of the most famous sales he has made in the past, and the reason behind it. 

In 2018, Buffett confirmed he had sold all of Berkshire Hathaway’s holdings in IBM. According to an interview with CNBC, the position was offloaded because his valuation of the company had gone “somewhat downward”. 

Buffett has also stated in the past that he will sell shares in a company when his capital could be put to more effective use elsewhere. He explicitly mentioned having to do this in his 2002 meeting with Berkshire Hathaway’s investors, admitting this was the primary reason for selling shares in Disney.

I can’t imagine that Berkshire Hathaway would be in the position of needing to do this at any time in the near future, as the business is sitting on $122bn of cash, and is reportedly waiting to buy an elephant-sized company.

We private investors may not have his kind of cash, but we need to have a similar outlook about the stocks we hold. As the media continues to predict a recession in the near future, I think it is important to remember the reason for purchasing any stock in the first place. Has anything fundamentally changed in the business that makes us want to re-evaluate our position? Would our capital be of better use elsewhere? Or are we getting cold feet because of market noise?

I think that asking ourselves these questions before selling could help us to remain calm and reasoned, just like Warren Buffett.

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T Sligo has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Walt Disney. The Motley Fool UK is short shares of IBM and has the following options: long January 2021 $60 calls on Walt Disney, short January 2020 $200 puts on IBM, short October 2019 $125 calls on Walt Disney, short September 2019 $145 calls on IBM, and long January 2020 $200 calls on IBM. 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.