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Berkshire Hathaway
Hold or Sell Berkshire?

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By MadCapitalist
December 17, 2007

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There has been a lot of discussion about whether to hold or sell Berkshire stock lately, as if only one or the other choice is the rational answer. However, I think that either choice can be appropriate based on your personal preferences.

In the past, I decomposed the total rate of return into two components:
1) The change in intrinsic value, and
2) The change in price relative to intrinsic value.

Assuming that the stock isn't significantly overvalued, holding onto a good company for long periods of time is a perfectly reasonable choice. The intrinsic value of a good company will increase at an above average rate, and the stock should provide returns that are reasonable. Even if you close your eyes to periods of excessive overvaluation, your returns should be okay, since the stock price will track the intrinsic value in the long run. You will be taking advantage of component #1 using this strategy. The reason that I said "Assuming that the stock isn't significantly overvalued" above is because this causes component #2 to negatively impact your returns as the price comes back down to intrinsic value.

As sound as this buy-and-hold-forever (or very long periods, if you want to quibble) strategy can be, it isn't likely to provide barnstorming rates of return. For very high rates of return, it is very likely that increases in intrinsic value (component #1) will be inadequate. You will also need to take advantages of the change in price relative to intrinsic value (component #2). The obvious strategy is to buy significantly undervalued stocks and then sell when it gets to intrinsic value. This strategy could even entail selling *before* the stock increases all the way to intrinsic value if stocks that are even *more* undervalued become available.

This second strategy is what the young Warren Buffett used in managing capital for his investment partnership. It is a more aggressive approach, and it takes more expertise and far more effort to do successfully. The older Warren Buffett uses a mix of the first and second approaches.

My personal preference is the more aggressive second strategy. I wouldn't buy or hold Berkshire at current prices, even though I think it will provide reasonable returns over the long run. I prefer to seek undervalued opportunities. My father uses the first approach, and he has been very successful with it.

In conclusion, if you are trying to decide whether to hold or to sell, get clear about which approach you prefer, and take it from there. Like Buffett, you can also mix the two approaches. It is important to have self-awareness about what is right for you.