“Our favorite holding period is forever.”
Words of Warren Buffett, Oracle of Omaha, Billionaire
Often the answer he gives when asked, “when should you sell your stocks”.
Warren Buffett have held stocks such as Coca Cola for more than 3 decades since 1988.
But there are also times when Warren have sold his stocks for a variety of reasons.
There are good reasons to sell your stocks and there are also very bad ones.
If you sell your stocks for the wrong reason, it can cost you your retirement or your next vacation to Hawaii.
Here, we will look at the few instance that Warren Buffett have sold his stocks and why does he decided it is the time to sell.
Good Reasons to sell a stock
1. Better Opportunity
“We would sell if we needed money for something else, I would reluctantly sell something terribly cheap to buy something even cheaper,”
One of the main reason that Warren Buffett will sell his stock is when he has found a even better deal then what he is having right now.
What Warren holds in his portfolio are all amazing stocks, but when he find a ‘great company’ which is on sale. Though reluctant, he will sell his stocks which has already risen above its intrinsic value.
With the extra cash, he will be able to maximize his return on investment.
However, this don’t happen too often to Warren Buffett.
Simply because, Warren’s holding company “Berkshire Hathaway” have more than $100 billion dollars in cash, waiting to be invested.
Here are some of the real-world example of stocks that Warren Buffett has sold, so that his capital can be deployed more effectively elsewhere.
- Goldman Sachs (NYSE:GS): Warren Buffett sold 13% of Berkshire’s Goldman Sachs shares a few years ago in 2015. His reason for that sale is to raise capital for the pending Precision Castparts acquisition.
- McDonald’s (NYSE:MCD): At the end of year 1995, Warren Buffett sold all his 60 million MacDonald Shares.
- Disney (NYSE:DIS): At the end of year 2000, Warren Buffett sold all his 5% stakes in Disney for a similar reason that he think he is able to get a better return else where.
2. Fundamentals Have Changed
“We sell after we re-evaluating the economic characteristics of the business. We probably had one view of the long-term competitive advantage of the company at the time we’ve bought it, and we may have modified that.”
The is the most common reason that Warren Buffett have decided to sell a stock. That is when the reason why he decided to buy the stock have changed.
Before Warren buy a stock, he will look at the the 3 important metrics that tells the story of the company:
- The competitive advantages of the business, or the MOAT
- Financial health of the company
- Management of the company
This is generally called the story of the company.
When the story of the company have changed, Warren will do a reassessment and decided if it is beneficial to hold on to the stock, or to sell the stock.
Here are some of the real-world example of stocks that Warren Buffett has sold, because the company’s story have changed.
- IBM (NYSE:IBM): Warren have gradually sold all his holding of IBM. Warren Buffett says, he have misjudged of IBM’s competitive advantages and have result in reevaluating IBM to a lower value which makes it no longer attractive.
- Freddie Mac (OTC:FMCC): Warren Buffett holds 9% stake of the mortgage giant Freddie Mac in the late 1990s. The selling decision is made because, he is seeing Freddie Mac taking too much risk in keeping its earning to grow at a double-digit. The mortgage industry have become too complex. Warren doesn’t like when things become too complex. And by year 2000, he have sold all his shares.
- ExxonMobil (NYSE:XOM): Warren was holding 41.1 million shares of ExxonMobil until he sell them off in the year 2014 that is worth $3.7 billion. When asked why he sell, he commended, “we might have other uses for the money.”
Warren Buffett seldom sell his stocks, but when he decide to sell them, it is usually due to 2 reasons:
- Better Opportunities can be made with the invested capital.
- Fundamentals of the Company have changed and it is no longer attractive.
As a bonus, we shall see some of the worst reason to sell your stocks.
Bad reasons to sell a stock
Reason to sell a stock are many, but here are some of the worst reasons to selling your stock.
1. Stock price is falling
Perhaps this is the most common mistake that most people made when deciding to sell their stocks. All novice investors make this mistake and sell their stocks of great company at dirt cheap price.
As you are reading right now on your handphone or desktop screen. Thousands of investors are selling their stock due to the Coronavirus Pandamic (Covid-19), trade war, social unrest, fear of recession, or fear of market melt down.
Smart investors on the other hand, take this opportunity to buy all these great stocks at a deep discount.
If your original reasons of buying the stock still applies, such as:
- Company have a good competitive advantages.
- The financial health of the company is good.
- The management is good.
Instead of selling the stock, when the price is falling, you should be buying these amazing stock at a cheap price instead.
2. Stock price have a sudden increase
Maybe not a bad decision that you have decided to sell your for a nice profit right?
Selling too early when the company is doing well with a high potential of growth can be a costly mistake.
Google (NASDAQ: GOOGL) for example, if you have brought the stock in late 2008, the price is at $150 per share. If you have sold it in 2013 at the price of $450, you would have tripled your money.
It don’t sounds too bad right? You have just tripled your money in just 5 years.
But if you have hold Google till today, you will have multiply your investment by almost 10 times at the price of $1,483 per share as of year 2020.
Ouch! That’s a lot of money!
So next time before you decided to sell, maybe it will be a good idea to find out the reason why the share price have risen.
“Let your winners run.”
3. Others are selling, the Billionaires are selling!
Before you start following the crowd and sell when a Billionaire, or an investment firm sell their holdings, you should always find out why.
There are many reasons that someone is selling their shares.
An investment firm can be selling their shares because, they want to re-balance their portfolio.
A billionaire such as Warren Buffett may want to sell his holdings because he requires more cash to perform an acquisition of a company.
Your friend next door is selling his share simply because he is scare of the market.
There can be millions of reason that someone is selling their shares. Do not let their reason to sell their shares affect your decision.
Selling simply because others are selling is a major mistake that many investors make.
The question of ‘When should you sell your stocks’ is highly dependent on your underlying reasons.
Good Reasons: Sell because that the company’s fundamental have changed where it is no longer attractive, or simply because you can use your money more effective in another investment are some great reason to sell.
Bad Reasons: Don’t sell because because others are selling, or simply because you just want to make a quick buck.
Road to successful investing is long, but there are shortcuts where we can reach success much faster.
Equip with the right investing knowledge can help small investor like you to succeed in investing.
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