Peter Lynch and Warren Buffett: When to Sell a Stock
Knowing when to sell stock is arguably the hardest question to answer in all of investing. There seems to be countless books, articles, and videos focused on how to analyze a stock and when you should buy a particular stock. However, there is much less attention, research, and thought given to a concept that is just as important: when should you sell a stock in your portfolio?
Just like any other question I have related to investing, I turn to the investors I respect the most to see how they approach the problem. In this case, it is both Peter Lynch and Warren Buffett. Every investor has faced this dilemma. Maybe the stock price has declined from where you bought it, and you need to determine whether to give up and sell or hold on for recovery. Or maybe you want the stocks you bought to shoot up in price quickly, and now you need to decide if you should sell and put the profits into a different stock.
Check out these clips of Peter Lynch and Warren Buffett describing how they determine when is the right time to sell stock. Make sure to like this video and subscribe to the channel if you found this content interesting.
"When you were actively managing money, you presumably are under the same pressures as other fund managers to show performance results. Did that incline you to sell too quickly sometimes?"
"Well, I think my greatest mistakes are probably – you know, it's funny – in a stock all you can lose is 100%. I've done that, but your great mistakes are selling a good company, and then it doubles, then it triples and quadruples because you make a lot of mistakes since those ones that go up tenfold like on the 10 baggers. So some of my mistakes are saying, 'Oh my god, this stock is too high,' and I was wrong. You had to figure out what inning am I in this baseball game. I sold Toys 'R' Us way too early; it went up 20-fold after I sold. I did the same thing at Home Depot. Those are probably two greatest mistakes I ever made."
"When should you sell? Well, you ought to find out why you bought a stock. If you're saying it's a cyclical company and they're doing poorly and they're doing awful, you wait till things are getting better, they're doing terrific, and then you sell it. But with a growth company, you have to say, in Walmart's case, 10 years after they went public, you could have bought the stock and made 500 times your money because they still are only in 15% of the United States. They could say, 'Why can't they go to 17? Why can't they go to 19? Why can't they go to 23?' So for the next four decades, they went around the country. You have to say to yourself, in this stock I have a 10-year story, a 20-year story. I'll be able to write that down and follow that. That's what I do with the company, and that's your decision; that's how you sell it."
"We have a novel element from many investors today in the trust issue. We also have security problems that we didn't traditionally have in America. Have they changed the way you pick and believe in stocks?"
"No, you still buy a company, and you buy a company to grow. And if it's a textile company or it's an electronics company, a software company, you better understand what they do. And if they do well, the stock will do well no matter what happens in the market. If the Dow Jones today was a thousand or 500, you would have made a lot of money in McDonald's. You would have made a lot of money in Johnson & Johnson. You would have made a lot of money in Gillette. These companies' earnings have gone up a lot the last 30 years. If the market was 50,000, you would have lost money in Burlington Industries. I recommended that in 1969; I think it's gone from 34 to 2 with no stock splits. These earnings have been terrible."
"Well, your modesty actually makes an important point, which is people with the best batting averages in the world don't bat a thousand. I sometimes get angry mail, particularly during bear markets, saying, 'So-and-so recommended such-and-such and it went down.' Well, how often did you come up with a clinker? This is a funny business! You don't have to be right even five times out of ten. If the times you're right, you make a double and triple; it offsets all those times you lose twenty to thirty percent. So when you buy, ask yourself, how much can I lose and how much can I make? And you ought to be able to make a lot. Because a lot of times people buy on the basis, the stock has gone down this much. You know, how much further is it going to go down? I remember when Polaroid went from 130 to 100. People said, 'Here's this great company, great record, but if it ever gets below 100, you know, just buy every share.' You know, and it did get below 100. A lot of people bought on that basis saying, 'Look, it's gone from 135 to 100; it's now 95, what a buy.' Within a year, it was 18."
"And this is coming with no debt. I mean as it comes, it was just so overpriced, it went down. I did the same thing in my, I think, my first or second year at Fidelity. Kaiser Industries had gone from 26 a year to 16. I said, how much lower can it go? It's 16. So I think we bought one of the biggest blocks ever in the New York, on the American Stock Exchange, of Kaiser Industries at 14. I said, you know, it's gone from 26 to 16; how much lower can it go? Well, at 10, I called my mother and said, 'Mom, you're going to look at this Kaiser Industries. I mean how much lower can it go? It's gone from 26 to 10.' Well, it went to six, it went to five, it went to four, and went to three. And now, I unfortunately have rapidly – I would probably be still caddying or working at the Stop and Shop, but it happened fast. I was able to this, and at three I figured out, you know, there's something very wrong here because Kaiser Industries owns 40% of Kaiser Steel. They own 40% of Kaiser Aluminum. They own 32% of Kaiser Cement. They own Kaiser Broadcast, and they own Kaiser Santa Gravel, Kaiser Engineers. They owned Jeep; they owned business after business, and they had no debt."
"Now, I learned this very early; this might be a breakthrough for some people. It's very hard to go bankrupt if you don't have any debt. It's tricky; some people can approach that; it's a real achievement. But they had no debt, and the whole company at three was selling at about $75 million. At that point, it was equal to buying one Boeing 747. I said there's something wrong with this company selling for 75 million. I was a little premature at 16, but I said everything's fine, and eventually this worked out. What they did is they gave away all their shares to their shareholders; they passed out shares in Kaiser Steel, they passed out their public shares in Kaiser Aluminum; they passed out shares in Kaiser Steel. They sold all the other businesses, and you get about $50 a share. But if you didn't understand the company, if you're just buying on the fact the stock had gone from 26 to 16, and then it got into 10, what would you do? When it went to nine, what would you do? When it went to eight, what would you do? When it went to seven? This is the problem that people have: they sell stocks because they didn't know why they bought it. Then it went down, and they don't know what to do."
"Now, do you flip a coin? Do you walk around the block? You know, what do you do? Psychiatrists haven't worked so far. I've never seen them running in the Side the Psychological Psychiatry Fund. I've never seen this listed with the SEC to make it through as a mutual fund. So they haven't seen the help; I've tried prayer; that hasn't worked. So if you don't understand the company, this is the problem when they go down."
"You have said that your favorite time to own a stock is forever, yet you sold McDonald's and Disney after not owning them for long. How do you decide when to hold forever and when to sell? And also are you and Mr. Munger wearing Fruit of the Loom?"
"I think I better answer the question. I can answer unequivocally: I am wearing Fruit of the Loom and I'm not sure whether Charlie wears underwear. Do you? I haven't bought any new underwear in a long time, and therefore I'm inappropriately attired."
"He's waiting for a discount; don't let him kid you. Well, the answer, it's a very good question about selling. I mean, it's not our natural inclination to sell. And on the other hand, we have held the Washington Post stock since 1973. I've never sold a share of Berkshire, having bought the first shares in 1962. And we've held Coke stock since 1988; we've held Gillette stocks since 1989; we've held American Express stock since 1991. We had actually previously been in American Express once in the 60s and Disney. So there are companies we're familiar with. We generally sell if we needed money for something else, but that has not been the problem the last 10 or 15 years. Forty years ago, my sales were all because I found something that I liked even better. I hated to sell what I sold, but I also didn't want to borrow money. So I would reluctantly sell something that I thought was terribly cheap to buy something that was even cheaper. Those were the times when I had more ideas than money. Now I've got more money than ideas, and that's a different equation."
"So now we sell really when we think that we've – when we're re-evaluating the economic characteristics of the business. In other words, if you take – I don't want to name names, but if you take a stock we've sold of some sort, we probably had one view of the long-term competitive advantage of the company at the time we bought it, and we may have modified that. That doesn't mean we think that the company is going into some disastrous period or anything remotely like that; we think McDonald's has a fine future. We think Disney has a fine future, and there are others. But we probably don't think that their competitive advantage is as strong as we might have thought as we initially made the decision. That may mean that we were wrong when we made the decision originally; it may mean that we're wrong now and that their strengths are every bit as what they were before. But for one reason or another, we think that the strengths may have been eroded to some degree. An example of that would be the newspaper industry generally, for example. I mean, in 1970, if Charlie and I were looking at the newspaper business, we felt it was about as impregnable a franchise as could be found. We still think it's quite a business, but we do not think the franchise in 2002 is the same as it was in 1970. We do not think the franchise of a network television station in 2002 is the same as it was in 1965, and those beliefs change quite gradually. And who knows whether they're precise, you know, whether they're right even? But that is the reason, in general, that we sell now."