Buffett and Fisher's Selling Criteria

A reader asked the following question in the comments:

How do Buffett and Fisher determine the timing and price for selling?

Regarding how Buffett determines the timing and price for selling, I shared a rough overview during an online discussion last weekend.

This is a core idea that both Buffett and Fisher have repeatedly mentioned in their statements and writings, and I believe it is very important. To some extent, it has been one of the most impactful insights I've gained from reading their works recently.

Both of these predecessors base their investment strategies on long-term investing. Therefore, when considering operations, they look at the value of an investment target from a long-term perspective and believe that the growth of value is the true core driver of price increases.

Under this fundamental strategy, all decisions made by these two predecessors focus on long-term factors that can genuinely increase value, while they do not pay attention to factors unrelated to value growth.

For example, market trends and macro policies (such as the Federal Reserve's monetary policy) are seen by them as having no relation to the growth of intrinsic value, and they both believe these factors are speculative and unpredictable.

Of course, if these factors significantly distort the price of an investment target, they would welcome it and take advantage of such market distortions.

What does this mean?

For instance, if the current price of Apple stock they hold is $500, and they believe its intrinsic value is also $500.

But if the market suddenly speculates that the Federal Reserve will definitely raise interest rates tomorrow, some traders might think that once the rates go up, the stock market could plummet, so they rush to sell today to buy back Apple at a lower price; while another group of traders might believe the news has already been digested, and if rates do rise, the stock market will actually soar, so they hurry to buy today.

However, they would not guess how the market should move based on the realization of this news to decide their operations for today.

But if the behavior of traders in the market leads to an extremely extreme situation for Apple’s price, for example, if Apple’s stock price suddenly jumps to $5000, then in this case, they are likely to sell, because this price is clearly far above its intrinsic value; or if Apple’s stock price suddenly plummets to $50, they are likely to buy, because this price is significantly below its intrinsic value.

As for the specific criteria for determining the timing and price for selling, Buffett has stated several specific standards, while Fisher has expressed them more abstractly.

Mr. Buffett has mentioned the following criteria:

• If funds are needed for essential company expenditures (for example, if Geico needs to pay out claims), he will sell stocks;

• If he believes that a stock's price has far exceeded its intrinsic value, he may (but not necessarily) sell the stock;

• If he discovers a more attractive investment opportunity (such as finding a cheaper value stock or a good company for a complete acquisition), he will sell the stock.

Recently, many people online have said that Buffett has sold at the peak of the U.S. stock market several times, interpreting this behavior as his judgment on the future market trends. In my opinion, this behavior aligns with one or more of the three points mentioned above.

Fisher's perspective is:

• If there are changes in the company's fundamentals (management, operations, R&D, etc.), he will sell the stock;

• If he finds a company that is more worth buying, he will sell the stock.

Aside from that, he rarely sells.

Fisher even believes that if he holds a good stock, even if its price rises to what is considered "too high" in the short term, he will not sell, because he believes that the price of this good stock will likely exceed the current "too high" price again in the future.

For example, he held Procter & Gamble for over 10 years, Motorola for 30 years, and Texas Instruments for 40 years…

Are the operations of these predecessors necessarily suitable for us? That varies from person to person. But I believe the logic and thinking behind them are worth learning from and emulating.