Investors love Warren Buffett quotes and learning from his vast experience and wisdom. His advice hasn't changed much over time, and he still touts the same important things to look for in a business you're evaluating that he did decades ago.
There are a few distinct quotes that stand out as oft-repeated, and one of them is that his "favorite holding period is forever." But that's only part of the quote -- and the rest of it adds a condition that changes its meaning completely.
Favorite isn't always
Even taken by itself, the idea that something is a favorite implies there's room for alternatives. Buffett sells stocks all the time, as illustrated through Berkshire Hathaway's public filings.
The complete quote goes like this:
When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds.
The key to holding forever is when you have an outstanding business with outstanding management -- only then is it worthwhile to hold.
The two examples Buffett himself often gives of his favorite, long-held stocks are Coca-Cola and American Express. He bought Coca-Cola stock between 1988 and 1994 for a total of $1.3 billion and American Express stock between 1991 and 1995 for the same total price. He noted that in 2022, dividend income from Coca-Cola equaled $704 million, and from America Express, $302 million.
He called those results "far from spectacular," but said that the price increases in the stocks were important. As of the end of last year, the Coca-Cola stock, without dividends, was worth $25 billion, while the American Express stock was worth $22 billion.
Since both of these companies retained outstanding businesses and outstanding management, they're worth holding onto. The implication is that if every stock he owned featured the same, he would hold onto them, too. But if they don't, he could cut them loose.
He continued Peter Lynch's flower analogy, saying: "The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders."
Prime investing strategy
Buying a stock and never selling under any circumstances isn't much of a strategy, but it's an approach to investing in the stock market. To be strategic, you need to know when to buy and sell.
Buffett is less quoted as saying, "You don't need to make your money back the way you lost it." He said this in his 1994 shareholder's letter, and said it was a "prime rule of investing."
When it's time to move on from a stock, he does so without hesitating. The example he gave at the time was USAir, which was selling for $0.25 on the dollar. Buffett and his team concluded that the declined value was "other than temporary" and closed out their position.
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Buffett does it all the time, selling a part of a position or closing one out entirely. Some recent examples are RH and Wells Fargo.
This may be harder to wrap your head around, probably because it becomes a realized loss as opposed to a paper loss. With a paper loss, the stock lost money but you still own it, so you haven't felt the loss in actual money. Once you sell, you lose that money, which is painful.
But keeping a bad apple on the chance that it goes back up is akin to watering weeds, according to Lynch and Buffett. Once you sell, you can take whatever funds remain and buy a higher-quality stock that has a better chance of appreciating in price.
That may not be Buffett's favorite way to invest, but it's a necessary part of the process if you're going to be a successful investor.
