Selling
Buffett believes in long-term investing in companies that enjoy enduring competitiveness. His ideal holding period is eternity. Buffett has said that he is not prepared to sell any of the companies that Berkshire owns outright. This does not mean that he is not prepared to sell his minority stakes in publicly traded companies or other investments, such as bonds. Selling is a rarer event for Buffett. His motivation to sell is primarily due to the following events:
1. The market bubble has grown too big
2. A better opportunity arises
3. A change in the business or its operating environment
4. The target price is met
Market bubbles are rare. They do not come many times in a century. A bubble takes a long time to form. It can be characterized by a period when companies with P/E ratios normally below twenty rise to forty or fifty. Corporate valuations have risen to levels that are untenable. During a bubble, bonds are likely to yield more than stocks, so it’s a good time to sell. As I write this in March 2017, bonds are in an even bigger bubble, so buying them is not recommended. Stocks are not suffering from bubble prices as I write, even though they are high.
Sometimes you may find yourself in a situation where you don’t have enough cash when you find a buying opportunity in an investment other than your holdings. In this case, you may have to sell your holdings if you can’t leverage them. Buffett sees this as a valid reason to sell so that you can invest your money in a better-performing asset. The expected return must be significantly higher for a switch to be justified. As I write this, Berkshire has so much cash on hand that it has no need to sell its holdings to buy better assets.
A market economy is a constantly changing system, which means that change is a natural part of it. Companies' business operations change, but they must not go in a direction where a permanent competitive advantage is lost or an entire industry melts away. Buffett's Berkshire Hathaway was a good example of the latter when its textile business moved to cheaper countries in the 1950s and 1960s. Banks and other financial institutions are the most dangerous investment targets because they are able to hide changes that threaten them on their balance sheets. This applies to companies in the industry whose profits and return on equity are disproportionately high. Berkshire sold Freddie Mac shares for this reason.
Meeting the target price is perhaps the rarest reason to sell, and this mainly applies to Berkshire's arbitrage trading, which is almost non-existent today. When the target price is met, it is good to sell because there is not much to gain, but even more to lose. Buffett engaged in this type of trading more when he had a private investment firm. Today, Berkshire's capital is so large that the benefits of such activity are not sufficient.
