Deciding when to sell a stock can be surprisingly confusing.
Do you sell because the price has gone up, lock in your profit, and then find morally questionable ways to spend it?
Do you sell because the price has gone down, cut your losses before things get worse, and quietly delete every message where you told your friends it was the opportunity of a lifetime?
Or do you sell because the stock has spent the last two years doing absolutely nothing while your friend who bought Bitcoin won’t stop sending you screenshots?
Luckily, Warren Buffett, arguably the world’s most famous investor, has talked about this subject many times.
And according to Buffett, there are three situations where selling a stock can make perfect sense.
In this article, we’re going to break down those three situations so you can make better investing decisions by learning from one of the greatest investors of all time.
But there’s something important you need to understand first.
Why most investors think about selling completely backwards.
And it usually starts with one number.
The price they paid.
Buffett once explained it like this.
A stock has absolutely no idea that you own it.
You might remember exactly what you paid for it.
You remember who recommended it.
You remember the excitement when you bought it.
You probably remember the exact coffee shop you were sitting in when you decided this company was going to make you rich.
The stock remembers none of this.
It doesn’t care.
Imagine a stock is trading at $50.
One investor bought it at $100.
He feels terrible.
Another investor bought it at $10.
He feels like Warren Buffett himself.
But they’re both looking at exactly the same investment today.
The stock doesn’t know what either of them paid.
And more importantly, the future of the business doesn’t change based on their purchase price.
Which means the fact that a stock has gone up, gone down, or spent three years moving sideways should not by itself determine whether you sell.
So what should?
Well, the first situation where Warren Buffett has historically been willing to sell is this.
When something better shows up.
During the first couple of decades of Buffett’s investing career, his decision to sell was often very simple.
He had found something better.
Buffett once explained that he might sell a stock trading at three times earnings because he had found another stock trading at two times earnings.
In other words, Buffett wasn’t asking, “Did I make money on this stock?”
He was asking, “Is this still the best place for my money?”
This is the idea of opportunity cost.
If you invest $10,000 in company A, that same $10,000 cannot simultaneously be invested in company B unless you’ve discovered a loophole in mathematics.
So sometimes you may own a perfectly good business but then discover an even better opportunity and now you have a decision to make.
Buffett faced exactly this situation in 1959 while running Buffett Partnership Limited.
At the time, he owned shares in a bank called Commonwealth Trust.
When Buffett originally bought the stock at around $50 per share, he estimated that it was actually worth roughly $125.
Later, the stock climbed to around $80, while Buffett estimated its intrinsic value had risen to about $135.
The investment was still undervalued.
Buffett didn’t think the person buying his shares at $80 was making a bad investment.
Quite the opposite, he believed the buyer could still do well over time.
But the opportunity was no longer as attractive as it had been.
Buying something worth roughly $125 for $50 was one opportunity.
Owning something worth roughly $135 when the market price had already risen to $80 was a very different one.
And Buffett had found somewhere else where he believed his capital could work harder.
Sanborn Map Company.
So he sold Commonwealth Trust and moved the money.
Not because Commonwealth had become a terrible business, not because the stock price had fallen.
He simply believed he had found a better use for his capital.
Now, this is where Buffett’s more recent advice can sometimes confuse investors.
Today, Buffett frequently talks about owning great businesses forever.
His famous preferred holding period is after all forever.
But there is an important distinction.
Modern-day Buffett controls Berkshire Hathaway, a company worth hundreds of billions of dollars.
Buffett has developed long-term relationships with the managers running those companies.
For Buffett, these businesses aren’t just numbers on a brokerage screen anymore.
They’re long-term partnerships.
But Buffett’s thinking wasn’t always exactly the same.
Back in 1968, he acknowledged that permanent ownership of controlled businesses might not produce the same returns as buying undervalued businesses and later reselling them.
Part of Buffett’s attitude may also have changed after his experience with Dempster Mill Manufacturing in the early 1960s.
Buffett bought the struggling company, dramatically cut costs, reduced jobs, improved the economics, and eventually sold it.
Financially, it worked.
Socially, the local town wasn’t exactly planning a Warren Buffett appreciation parade.
But if we go back to Buffett’s partnership days when he managed far less money, his philosophy was much more straightforward.
His bread and butter strategy was buying undervalued securities and selling them when the undervaluation disappeared.
Nothing personal, just capital allocation.
Which brings us to the second situation where Buffett would consider selling.
When the business fundamentally changes.
Buffett has said that Berkshire generally doesn’t want to sell good businesses unless they become seriously discouraged by management or the economic characteristics of the business change in a major way.
And this distinction is important.
A falling stock price is not a fundamental change.
A bad quarter is not necessarily a fundamental change.
A scary headline is not necessarily a fundamental change.
Your uncle sending “sell everything” to the family WhatsApp group is definitely not a fundamental change.
But losing the competitive advantage that made you buy the company in the first place, that might be.
We’re talking about something that materially changes the long-term economics of the business.
And Buffett has encountered several examples throughout his career.
One of the most famous came in 2020.
Berkshire Hathaway owned significant stakes in major US airlines.
Then the COVID-19 pandemic arrived.
Global travel collapsed.
Planes were grounded.
Airlines suddenly faced a completely different economic reality.
Buffett concluded that the world had changed for the airline industry and Berkshire sold its airline positions.
Another example was the Washington Post.
Buffett first invested in the company in 1973.
For decades, newspapers had extraordinary competitive advantages.
In many cities, the dominant newspaper controlled the distribution of local information and advertising.
If businesses wanted to reach local customers, there weren’t exactly 400 competing apps fighting for their attention.
But then the internet arrived, and slowly the economics of the newspaper industry changed.
Advertising moved online.
Information became freely available.
The competitive advantages Buffett originally admired became weaker.
After years of discussing the deterioration of newspaper economics, Buffett eventually sold Berkshire’s Washington Post stake in 2014.
The lesson here isn’t that every piece of bad news means you should sell.
In fact, Buffett has repeatedly warned against selling excellent businesses simply because the headlines suddenly become frightening.
Bad news happens.
Recessions happen.
Competitors appear.
The question is whether the underlying economics of the business have permanently changed because those kinds of changes are actually quite rare.
And that brings us to the third situation where selling or at least reducing your position can make sense.
When one investment becomes too large.
Warren Buffett is famous for believing in concentrated investing.
He has never been particularly interested in owning 200 companies simply for the sake of saying he owns 200 companies.
If Buffett finds an extraordinary opportunity, he’s willing to invest heavily, very heavily.
But even Buffett has recognized that there can be a point where one investment becomes too large relative to the rest of the portfolio.
One famous example is American Express.
In the 1960s, Buffett made an enormous investment in the company.
At one point, American Express represented roughly 40% of Buffett Partnership’s assets.
Think about that.
Four out of every $10 in one company.
And Buffett wasn’t managing someone’s $7,000 Robinhood account.
Adjusted for today’s money, he was managing hundreds of millions of dollars.
Eventually, as the position grew, Buffett reduced it to maintain some level of diversification.
So, yes, don’t put all your eggs in one basket still applies.
Buffett just seems comfortable using a considerably larger basket than most financial advisers.
And this brings us back to the biggest mistake investors make when deciding whether to sell.
They focus on the price they paid.
“I can’t sell now, I’m down 30%.”
Or, “I should sell now, I’m up 100%.”
But neither statement tells you anything about what the underlying business is actually worth today or what it might be worth in the future.
Your purchase price is history.
The business is moving forward.
Which leads to one very useful question.
If I didn’t already own this stock, would I still want to invest in this company today?
If the answer is no, you should probably understand exactly why.
Maybe you found a much better opportunity.
Maybe the economics of the business have fundamentally changed.
Maybe management has destroyed your confidence.
Or maybe the position has grown so large that your entire financial future now depends on one CEO having a good decade.
Now, just because you wouldn’t buy more of a stock today doesn’t necessarily mean you should sell what you already own.
Selling can trigger capital gains taxes.
There may also be transaction costs.
So, there can be a gap between the price where you’d happily buy more and the price where you definitely sell.
And in between those two points is perhaps the most underrated strategy in investing.
Doing absolutely nothing.
No buying, no selling, no refreshing your portfolio 17 times before breakfast, just owning the business.
So according to the principles Warren Buffett has followed throughout his investing career, there are three major situations where selling can make sense.
When you found a significantly better opportunity for your capital.
When something fundamental about the business or its management has changed.
Or when one investment has become so large that your portfolio is dangerously concentrated.
But notice what’s missing from that list.
The stock went up.
The stock went down.
The stock hasn’t moved.
None of those by themselves tell you whether you should sell because the stock doesn’t know what you paid for it.
The market doesn’t know what you paid for it.
And the business certainly doesn’t care.
The only thing that matters is what the business is worth today, what you believe it can become tomorrow, and whether your money has somewhere better to be.
