Learn to invest with Buffett

Chapter 51

Chapter 8 Section 3 When the stocks you hold no longer meet the investment criteria, you must sell them decisively

One of my favorite time horizons to own a stock is forever, but it's important to emphasize that we don't sell shares just because they've appreciated in value, or because we've held them for a long time.

--Warren Buffett
Buffett said: "My favorite stock to hold is forever." However, Buffett does not hold all the stocks he buys for a long time. In fact, he believes that only a very small number of stocks are worth doing.Any economist will tell you that the vast majority of stocks you buy are for sale, otherwise you will never get the maximum profit return.In the same way, every investor should be aware of this truth when investing in stocks.Otherwise, you should be buying real estate, not stocks.But you also need know-how when selling. What kind of stocks to sell, when to sell, and how much to sell are all issues that you have to think carefully.Buffett believes that to sell, the first choice is to invest in stocks that no longer meet his investment standards.

For Buffett, there are two main situations that do not meet his investment criteria:

1. There has been a fundamental change within the company.Buffett publicly stated in his 1986 annual report that he hoped to permanently retain three holdings: Met/ABC, GEICO and The Washington Post.But after Disney acquired ABC, Disney spent a lot of money in the Internet boom, which hindered its development. Buffett began to reduce his holdings in 1998, and sold almost all his Disney shares in 1999.

2. Significant changes have taken place in the development prospects of the industry in which the company operates.Buffett said at the 2006 shareholder meeting: "Newspapers are still very profitable, especially compared with the tangible assets invested, but their development prospects are not as optimistic as they were two or three decades ago. The number of readers is decreasing. It will erode the benefits of the newspaper industry in the long run. We still own the World Book (the publisher of the encyclopedia), and we have sold 30 copies at a price of 600 yuan each. The problem is that with the development of the Internet, it is no longer Books need to be bound and delivered, and people can find the same wealth of information online. It's not that the product itself isn't worth the price anymore, it's just that people have other options. I don't see anything that's going to change that. Buffett believes that the nature of newspapers and other media industries has changed, but it is a bit worrying that stock prices have not yet reflected this.Buffett is likely to sell newspaper companies such as The Washington Post and World Book.

The main reasons for selling this stock are:
1. In the first case, there is a change in the way the company operates within the company.In Buffett's investment principles, he has emphasized that a good company must have a rational manager, that is, an expert at cutting costs. When encountering the situation in the above case, the behavior of the Disney company's managers has gone beyond rationality. Analytical boundaries hold back the company's growth.This risky behavior made Buffett feel that his margin of safety was endangered, so of course he would sell shares to avoid risks.From this perspective, Buffett attaches great importance to the investigation of the actual operation of the company.Fisher, a scholar who had a great influence on him, paid great attention to the company's essential value factors, especially the company's internal management capabilities, which has always been deeply recognized by Buffett.

2. The second situation is that the development prospects of the company's industry have undergone major changes.If Buffett finds that the development prospect of an industry is not as good as it was at the beginning, then he will definitely sell without hesitation.Because without a good development prospect, it is impossible to have a good profit appreciation space, so it is impossible to have a high rate of return.On the contrary, in order to maintain the current state, such a company will inevitably waste more money of innocent shareholders.This is actually what Fisher repeatedly emphasized in his theory.

It can be seen that Buffett's move to buy and sell stocks is mainly influenced by Fisher's theory, and it is this kind of thinking theory that has benefited Buffett a lot and allowed him to make more accurate decisions.

Investment motto:

It is a very wise choice to hold a stock for a long time, but it does not mean unconditional long-term holding, for example, when there is a change in the company's internal management method or a major change in the development prospects of the company's industry When the time comes, you can change your stock holding strategy and sell your own stocks decisively.

(End of this chapter)