When To Sell

Warren originally followed Graham’s approach to selling, which was selling when the security reached its intrinsic value. However, there was the problem that the longer it took for the stock to reach its intrinsic value, the lower the annual compounding rate would be. There also was the problem of certain stock never reaching its intrinsic value. Graham decided that if the security did not reach its intrinsic value in two to three years, it was simply best to sell the stock and find a new investment.

            Warren at first followed this strategy, but found that more often then not, he was left holding on to a dog that never rose to its intrinsic value. Furthermore, even if he did buy a security that rose to its intrinsic value, the IRS would charge him capital gains tax as soon as he sold them. Thus, he followed another strategy by Munger and Fisher, who argued that once an excellent business was bought with excellent growth and management functioned with shareholders financial gain as their primary concern, the time to sell was never. Munger and Fisher believed that superior result could be achieved if investors could fully benefit the compounding effect of the business profitably employing its retained earnings.

In order to implement this technique, Warren based his investment strategy on the economic nature of the business. The excellent business with high rates of return on equity, identifiable consumer monopoly and shareholder oriented management became his primary investment targets. Price still dictated whether the stock would be bought and what Warren’s annual compounding rates of return would be. But once the purchase was made it would be held for many years as long as the economics of the business didn’t change dramatically for the worse. A good example of this is the Washington Post and GEICO giving good rates of returns of 17% or better for the last twenty years.

Warren also does not believe in the bear/bull market and ignores it. He can do this because he buys into a business on the basis of price. If the price is too high, the investment won’t offer a sufficient rate of return and he won’t buy in. Warren does not follow the market at all. He is aware that great buys can show up even in a raging bull market but he also has found that a bear market where lots of companies are being sold cheap offer him his greatest opportunity to find a really good deal. A good example is the stock market crash of 1987 when all the market went crazy, Warren hung in there waiting for a good business to come in and it was Coca-Cola that came up and he jumped in to buy the shares. He bought the stock when other saw fear in it. Thus we can see that Warren is interested in a long-term perspective and ownership. Warren wants the compounding to go on as long as possible. Sure over the short term he could sell and make a handsome profit, but he is after an outrageous profit, the kind that makes you one of the richest in the world. To get rich Warren gets capital to compound at a high annual rate of return for a long time.

Warren originally followed Graham’s approach to selling, which was selling when the security reached its intrinsic value. However, there was the problem that the longer it took for the stock to reach its intrinsic value, the lower the annual compounding rate would be. There also was the problem of certain stock never reaching its intrinsic value. Graham decided that if the security did not reach its intrinsic value in two to three years, it was simply best to sell the stock and find a new investment.

            Warren at first followed this strategy, but found that more often then not, he was left holding on to a dog that never rose to its intrinsic value. Furthermore, even if he did buy a security that rose to its intrinsic value, the IRS would charge him capital gains tax as soon as he sold them. Thus, he followed another strategy by Munger and Fisher, who argued that once an excellent business was bought with excellent growth and management functioned with shareholders financial gain as their primary concern, the time to sell was never. Munger and Fisher believed that superior result could be achieved if investors could fully benefit the compounding effect of the business profitably employing its retained earnings.

In order to implement this technique, Warren based his investment strategy on the economic nature of the business. The excellent business with high rates of return on equity, identifiable consumer monopoly and shareholder oriented management became his primary investment targets. Price still dictated whether the stock would be bought and what Warren’s annual compounding rates of return would be. But once the purchase was made it would be held for many years as long as the economics of the business didn’t change dramatically for the worse. A good example of this is the Washington Post and GEICO giving good rates of returns of 17% or better for the last twenty years.

Warren also does not believe in the bear/bull market and ignores it. He can do this because he buys into a business on the basis of price. If the price is too high, the investment won’t offer a sufficient rate of return and he won’t buy in. Warren does not follow the market at all. He is aware that great buys can show up even in a raging bull market but he also has found that a bear market where lots of companies are being sold cheap offer him his greatest opportunity to find a really good deal. A good example is the stock market crash of 1987 when all the market went crazy, Warren hung in there waiting for a good business to come in and it was Coca-Cola that came up and he jumped in to buy the shares. He bought the stock when other saw fear in it. Thus we can see that Warren is interested in a long-term perspective and ownership. Warren wants the compounding to go on as long as possible. Sure over the short term he could sell and make a handsome profit, but he is after an outrageous profit, the kind that makes you one of the richest in the world. To get rich Warren gets capital to compound at a high annual rate of return for a long time.