How to Decide When to Sell a Stock Like Warren Buffett?

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“Our favorite holding period is forever.”

Words of Warren Buffett, Oracle of Omaha, Billionaire

Often the answer he gives when asked is, “when should you sell your stocks”.

Warren Buffett has held dividend-paying stocks such as Coca-Cola for more than 3 decades since 1988.

But there are also times when Warren has sold his stocks for a variety of reasons. Some good, some bad.

If you sell your stocks for the wrong reason, it can cost you your retirement. It is one of the most common mistakes of beginner investors.

Here, we will look at the few instances in which Warren Buffett sold his stocks and why he decided it is the time to sell.

Let’s go!

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,”

Warren Buffett.

One of the main reasons that Warren Buffett will sell his stock is when he has found an even better deal than what he is having right now.

What Warren holds in his portfolio are all amazing stocks, but when he finds a ‘great company’ that is on sale. Though reluctant, he will sell his stocks that have already risen above their intrinsic value.

With the extra cash, he will be able to maximize his return on investment.

However, this doesn’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.

Example:

Here are some of the real-world examples 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 the year 1995, Warren Buffett sold all his 60 million MacDonald’s Shares.
  • Disney (NYSE: DIS): At the end of the year 2000, Warren Buffett sold all his 5% stakes in Disney for a similar reason that he thinks he is able to get a better return elsewhere.
How to Decided When to Sell Stocks Like Warren Buffett - Better Opportunity
Good Reason to Sell Stocks – Better Opportunity

Read Also: Warning Signs of Stock Market Crash

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.”

Warren Buffett.

Changing fundamentals is the most common reason that Warren Buffett has decided to sell a stock. When the reason why he decided to buy the stock changed, he sells it.

Before Warren buys a stock, he will look at the 3 important metrics that tell the story of the company:

  1. The competitive advantages of the business, or the MOAT
  2. The financial health of the company
  3. Management of the company

This is generally called the story of the company.

When the story of the company has changed, Warren will do a reassessment and decide if it is beneficial to hold on to the stock or to sell the stock.

Example:

Here are some real-world examples of stocks that Warren Buffett has sold because the company’s story has changed.

  • IBM (NYSE: IBM): Warren has gradually sold all his holdings of IBM. Warren Buffett says, he has misjudged IBM’s competitive advantages which have resulted in reevaluating IBM to a lower value which makes it no longer attractive.
  • Freddie Mac (OTC: FMCC): Warren Buffett holds a 9% stake in 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 earnings growing at double-digit. The mortgage industry has become too complex. Warren doesn’t like when things become too complex. And by the year 2000, he has 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 which is worth $3.7 billion. When asked why he sell, he commended, “we might have other uses for the money.”

Warren Buffett seldom sells his stocks, but when he decides to sell them, it is usually due to 2 reasons:

  1. Better Opportunities can be made with the invested capital.
  2. The fundamentals of the Company have changed and it is no longer attractive.

Holding great stocks helps you build passive income for your retirement, while bad stocks make you lose potential opportunities and decrease your capital.

As a bonus, we shall see some of the worst reasons to sell your stocks.

How to Decided When to Sell Stocks Like Warren Buffett - Fundamentals Changed
Good Reason to Sell Stocks – Fundamentals Changed

Bad Reasons To Sell A Stock

There are many reasons to sell a stock, but here are some of the worst reasons to sell 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 a 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 Pandemic (Covid-19), trade war, social unrest, fear of recession, or fear of a market meltdown.

Smart investors, on the other hand, take this opportunity to buy all these great stocks at a deep discount.

If your original reasons for buying the stock still apply, such as:

  • Companies have a good competitive advantage.
  • 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 stocks at a cheap price instead.

Bad Reason To Sell Stocks - Price is Falling
Bad Reason To Sell Stocks – Because Others Sold

Read Also: Ways to profit from a Market Crash

2. Stock prices have a sudden increase

Maybe not a bad decision that you have decided to sell yours for a nice profit right?

Wrong!

Selling too early when the company is doing well with a high potential for growth can be a costly mistake. 

Google (NASDAQ: GOOGL) for example, if you 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 doesn’t sound too bad right? You have just tripled your money in just 5 years.

But if you have held Google till today, you will have multiplied your investment by almost 10 times at the price of $1,483 per share as of the 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 has risen.

“Let your winners run.”

Bad Reason To Sell Stocks - Price Raised Sharply
Bad Reason To Sell Stocks – Price Raised Sharply

Read Also: Way to Invest When You Have Little Money

3. Others are selling, the Billionaires are selling!

Before you start following the crowd and sell when a Billionaire or an investment firm sells their holdings, you should always find out why.

There are many reasons that someone is selling their shares.

An investment firm can be selling its shares because they want to re-balance its 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 scared of the market.

There can be millions of reasons 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. 

Bad Reason To Sell Stocks - Because Others Sold
Bad Reason To Sell Stocks – Because Others Sold

Read Also: Amazing Advantages of Small Investors, Your Fund Managers Want to Keep You in the Dark

When Should You Sell Your Investment Then?

The question of ‘When should you sell your stocks’ is highly dependent on your underlying reasons.

  • Good Reasons: Sell because the company’s fundamentals have changed where it is no longer attractive, or simply because you can use your money more effectively in another investment are some great reasons to sell.
  • Bad Reasons: Sell because others are selling, fear of losing out, or simply because you just want to make a quick buck are some of the worst reasons to sell a stock.

The road to successful investing is long, but there are shortcuts where we can reach success much faster.

Knowledge

Equipping with the right investing knowledge can help small investors like you to succeed in investing.

“One can best prepare themselves for the economic future by investing in your own education. If you study hard and learn at a young age, you will be in the best circumstances to secure your future.”

Warren Buffett

Knowledge of investment can be learned from books or articles like this one. Reading can only make you wiser and smarter so that you too may be able to make the right decision in your investment.

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Founder & Financial Writer at Income Buddies | Website | Posts by Author

Antony C. is a dividend investor with over 15+ years of investing experience. He’s also the book author of “Start Small, Dream Big“, certified PMP® holder and founder of IncomeBuddies.com (IB). At IB, he share his personal journey and expertise on growing passive income through dividend investing and building online business. Antony has been featured in global news outlet including Yahoo Finance, Nasdaq and Non Fiction Author Association (NFAA).

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