Many investors pay close attention to what Warren Buffett is buying, trying to formulate a strategy to build their own winning portfolios. But, knowing when to walk away from an investment is just as important as knowing when to buy. Here are three situations when Buffett had sold some of his stocks, and what you can learn from them. Your original reasons for buying no longer apply Up until a little over a year ago, Berkshire Hathaway, the conglomerate controlled by Buffett, was one of ExxonMobil’s largest shareholders. Buffett has said (and still does) that oil & gas giant ExxonMobil is an…
Many investors pay close attention to what Warren Buffett is buying, trying to formulate a strategy to build their own winning portfolios. But, knowing when to walk away from an investment is just as important as knowing when to buy. Here are three situations when Buffett had sold some of his stocks, and what you can learn from them.
Your original reasons for buying no longer apply
Up until a little over a year ago, Berkshire Hathaway, the conglomerate controlled by Buffett, was one of ExxonMobil‘s largest shareholders.
Buffett has said (and still does) that oil & gas giant ExxonMobil is an excellent company. But, at the time Berkshire invested US$3.4 billion in ExxonMobil, oil prices were high, and Buffett and his team had an optimistic view of the company and oil in general.
In fact, Buffett’s business partner Charlie Munger said in 2013 that “Oil is absolutely certain to become incredibly short in supply and very high-priced.” And, while this may eventually be the case, he was obviously off on the time frame given that oil is currently down by over half from a 2014 peak of over US$100 per barrel.
Less than two years after making his big investment, Berkshire unloaded its entire ExxonMobil stake in the fourth-quarter of 2014. In an interview, Buffett said “I did get less enthusiastic about crude oil prices at the time we owned Exxon.” He went on to say that he didn’t think oil’s future was going to be as bright as many people were thinking.
The bottom line is that if you buy a stock because you’re optimistic about its business and then the opposite happens, it’s okay to admit that you were wrong and get out.
The company starts getting greedy
In the 1980s, Warren Buffett bought a large stake of Freddie Mac stock, saying that shares were “ridiculously cheap”. And, he was right. By 1998, Berkshire owned about 9% of Freddie Mac, a U.S. company that buys housing mortgages in the country, and the stake was worth about US$3.9 billion – about 12 times Berkshire’s initial investment.
But, Buffett saw signs of trouble in the late 1990s. He noticed that the company was too focused on its quarterly results, and started taking on much more risk than it should. Former Freddie Mac CEO Leland Brendsel was focused on delivering double-digit earnings growth, and started making investments that had nothing to do with the company’s business model. As a result, Buffett said that he “was concerned about what they might be doing…that I didn’t know about.”
Buffett follows the saying “there’s never just one cockroach in the kitchen,” and proceeded to sell substantially all of Berkshire’s Freddie Mac shares by 2000.
Over the next decade, Freddie Mac (and others’) greed got the best of them, and pushed the U.S. mortgage system and the U.S. economy to the brink of collapse. Freddie Mac is currently under government conservatorship, and Buffett’s 9% stake would be worth less than US$90 million today.
When you see signs of greed, or that management is doing things that don’t make any sense in the company’s business model, it may be time to get out.
You’d rather put your money to work elsewhere
Buffett had recently sold two stocks: U.S. banking giant Goldman Sachs and hypermarket behemoth Wal-Mart. Now, Buffett didn’t sell all of his shares. He got rid of 13% of Berkshire’s Goldman shares and 7% of its Wal-Mart shares.
There may or may not have been company-specific reasons that caused Buffett to reduce his exposure to these stocks – we can’t know for sure – but he did reveal his primary motivation for the sale: Berkshire had decided to acquire Precision Castparts for US$32 billion, and Buffett wanted to raise cash to help finance the acquisition.
The same logic applies to your portfolio: If you feel that you can use your money for better purposes, don’t be afraid to reduce your exposure to some of your stocks.
Know when to walk away
Warren Buffett has said in regards to Berkshire’s stock portfolio that “Our favorite holding period is forever.” And, while it’s a solid investment strategy to buy stocks with the intention of holding them forever, it’s equally important to understand that there are some valid reasons to sell.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Matthew Frankel and first published on fool.com. It has been edited for fool.sg.