When Would Buffett Sell?

I've detailed the brilliance of Warren Buffett's buys in the past. And I'm not the only one who holds him in such esteem.

The investing world hangs on his every move. The copycat buying is so severe that he occasionally gets a special exemption from the Securities and Exchange Commission to delay disclosing those moves.

Even his maybe-possibly-perhaps buys move markets. After Chinese clothing maker Dayang Group outfitted Buffett in some suits, he publicly proclaimed his love. The resulting buying frenzy has turned the Shanghai-listed stock into an international multibagger sensation in mere months. Speculators are hoping his fandom turns into ownership, just as it has in the past with Coca-Cola (NYSE:KO), GEICO, and Washington Post.

We spend much less time poring over his sells -- but they're even more important. Why? Because the man whose favorite holding period is forever absolutely hates selling. So when he sells, there are very good reasons. Here are just a few of them.

Sell when you're wrong
Yes, Warren Buffett makes mistakes. The name of his company, Berkshire Hathaway (NYSE:BRK-B), is a reminder of that fact.

Before it became a wide-ranging conglomerate, Berkshire Hathaway was a textile mill. Ironically, given his recent endorsement of a Chinese textile maker, he chose to cease operations because he couldn't compete profitably with the cheap labor of foreign competition.

It took him about 20 years to admit he was wrong and cease operations, but he learned that lesson well. When he bought a big stake in ConocoPhillips (NYSE:COP) near the height of 2008's oil bubble, he quickly admitted his mistake and began selling out of his position.

Sell when the grass is greener
Earlier this year, my colleagues Brian Richards and Tim Hanson fleshed out this case in "Why You Should Sell."

Basically, no matter how good an investment is, you should sell if a better opportunity is out there.

Buffett sold a slug of Johnson & Johnson (NYSE:JNJ) in the fourth quarter of last year. Why? Not because he lost faith in Johnson & Johnson (he actually picked up some shares in the two subsequent quarters). Nope, he just had better opportunities available to him. Remember, this was when the financial sky was falling and companies like Goldman Sachs (NYSE:GS) and General Electric (NYSE:GE) were throwing money at him: Each gave him 10% interest rates plus equity upside in exchange for his money and his name.

Sell when you're overmatched
In this case, selling means not buying in the first place. Buffett generally refuses to buy technology companies. When one of your best buddies is Bill Gates, it's hard to claim technological ignorance. Yet, he does.

He's commented that Google (NASDAQ:GOOG) has an amazing moat, but it's a moat he refuses to exploit. Why? Because he can hazard a pretty good guess what Coke will look like 50 years from now. He knows he can't do that with Google.

So he stays away.

Sell when you've won
By the late '90s, Buffett was sitting on a huge mispricing with Coca-Cola. Like the rest of the market, its shares had run up to silly heights. In Coke's case, it was selling for more than 50 times earnings.

Yet Buffett didn't sell. A decade later, shares are down more than 30%.

Why didn't he sell? Remember that his sales move markets, so getting out of his position would have been a slow process. Perhaps more importantly, Buffett had declared Coca-Cola a "permanent holding," similar to his controlled businesses like GEICO and Dairy Queen. Selling Coke would have been a lucrative move, but it would have cost him a little of his reputation.

We don't have these constraints, so there's no reason we shouldn't exploit our advantage when the market gives us a quarter for our dime.

Buy or sell?
As Buffett has shown us, there are plenty of good reasons to sell. Remember, though, that his sells have occurred over decades. His ideal holding period is still forever, but he knows holding based solely on principle is a recipe for defeat.

Like Buffett, our founders -- Tom and David Gardner -- have a strong preference for buying and holding for the long run. In their Motley Fool Stock Advisor newsletter, they tend to let their winners run. However, they can tell you from experience that knowing when to sell is almost as important as knowing when to buy. Hence, each month they update their sells as well as their buys. Canadian National Railway and Dolby Laboratories are two of their best buys now. I invite you to see the rest by clicking here for a 30-day free trial. There's no obligation to subscribe.

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Anand Chokkavelu owns shares of Berkshire Hathaway and his ideal holding period is until the hug gets awkward. Google is a Motley Fool Rule Breakers recommendation. Berkshire Hathaway, Canadian National Railway, and Dolby Laboratories are Stock Advisor selections. Berkshire Hathaway and Coca-Cola are Inside Value picks. Johnson & Johnson and Coca-Cola are Income Investor picks. The Fool owns shares of Berkshire Hathaway and has a disclosure policy.