Motley Fool CEO Echoes Buffett: “The Best Time to Sell a Stock Is Never”

Billionaires and CEOs say the darnedest things. Billionaire and CEO Warren Buffett, for example, who has grown his company, Berkshire Hathaway, by an annual average of nearly 20% over close to 60 years, is credited with saying that “the best time to sell a stock is never.”

Motley Fool CEO Tom Gardner, in a recent talk, echoed Buffett’s words, explaining that he, too, sees infrequent trading as a key to getting rich. Here’s a look at what both have said on the matter.

Tom Gardner said…

In his recent talk, Gardner offered five rules to follow for your first few years of investing — if you want to get rich. One of his rules was to not day trade. Here’s his relevant statement, paraphrased a bit:

… Warren Buffett turned $10,000 as a teenager into $100 billion in his lifetime by essentially saying the best time to sell a stock is never, that’s how you’re gonna make the most money. If you can find Costco early on and just hold it, you’re going to become a millionaire. Day trading Costco, there’s just a tragedy of epic proportions.

This makes sense, if you think about it. The companies we know today that have grown like gangbusters have done so over decades. If you’ve been along for much of that ride — even if you got in a lot later than you would have wanted — you’ll likely make a tidy profit.

Buffett also said…

When Buffett says his favorite holding period is forever, that means he invests in stocks (or buys entire businesses) that are worthy of being held forever. He seeks high-quality companies with great growth prospects — and has said “Never invest in a business you cannot understand.”

Buffett has shared other thoughts on selling, too:

You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long, dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.

That quote alludes to how many of us often trade our stocks too often because we feel we need to be active investors, to do something. Instead, Buffett notes that it’s OK to do nothing when there’s nothing to be done.

Buffett has also said “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” Having a long-term mindset is important if you want to build wealth over the long run.

What are some good reasons to sell?

Despite all this good advice to be a long-term holder of great stocks, there are some good reasons to sell stocks. For example:

• Sell if you need the money now — or expect to within a few years. It’s best not to keep money you’ll need in the next five (if not 10) years in stocks, as the market can be volatile over the short term.
• Sell if you don’t understand the company. If you don’t have a good handle on how exactly it makes its money and the challenges it faces, you could end up with unpleasant surprises one day.
• Sell if the thesis has changed. For example, maybe you bought into a company known for its capital-light online marketplace that generated fat profit margins. If it decides it’s going to start manufacturing its offerings itself, that will likely shrink profit margins. You may no longer want to own it.
• Sell if the holding has grown so much that it’s now a big portion of your portfolio. You don’t want too many eggs in one basket, so consider rebalancing.
• Sell if the stock seems wildly overvalued, with a decent chance of retreating to a more reasonable level. (You might ignore this rule and still make money, though, if you plan to remain invested for many years.)
• Sell if you’ve found a much more compelling other investment.

Conversely, here are some bad reasons for selling:

• You’ve just earned 50% on your investment, or perhaps 100%. Remember that by holding on for many years, your total gain could be 300% or 1,000%, or more. Go ahead and think through the merits of holding or selling first, though.
• You bought into the stock and it’s been a month or a year and it hasn’t grown much. Patience is very important for long-term stock investors. Great companies will sometimes experience lulls. Do some digging to make sure the company’s health and growth potential remain intact. If so, hang on.
• You bought a stock and it dropped in value. Even good companies will see their stocks fall now and then, potentially sharply. Read up on the situation to determine whether the company is facing a temporary, fixable challenge or a big, long-lasting problem.

As you go through your investing life, aim to be a long-term investor, hanging on to great stocks for long periods.