Warren Buffett says that his favorite holding period for a stock is forever. But in his latest column for Canada’s Globe and Mail, Validea CEO John Reese says that good investors, including Buffett, are willing to sell stocks in shorter periods, too.
“To Mr. Buffett, stellar businesses are steady, reliable compounding machines, and he would rather hold onto one of them forever than try to make a profit by jumping in and out of other less worthy stocks at the right times,” Reese writes. “But that doesn’t mean Berkshire won’t ever sell a stock. Every quarter, the company makes some adjustments to its holdings – sometimes extremely significant changes. … When Mr. Buffett and Berkshire do sell, however, it doesn’t seem to be because they are looking to make a quick gain or because a short-term fear has arisen. Instead, it’s because the conditions that led to their initial bullish thesis have changed.”
Reese says that he uses the same general concept when determining when to sell a stock, though the specifics of his own approach are quite different. He looks at how his Buffett-based portfolio has fared using different rebalancing frequencies. Interestingly, he says, a monthly approach has outperformed both a quarterly approach and an annual approach.
“I’m not saying Mr. Buffett should be rebalancing Berkshire’s portfolio every month,” Reese says. “His $100-billion (U.S.) portfolio presents logistical challenges that individual investors don’t have to deal with. The key point is that quickly ditching a stock whose underlying fundamentals change for the worse doesn’t make you a bad long-term investor. Good long-term investors sell a stock when the reasoning used to buy it no longer holds up, regardless of how long they held the stock.
“On the other hand,” Reese adds, “selling a stock when it has a bad month in terms of price performance, or when scary headlines about it surface, or when it reaches a certain price target, are all ways in which you allow emotion and cognitive biases to enter your investment process. Far more often than not, that leads to trouble over the long haul.”