Buffett and Soros: 4 Strategies for Selling Investments – 08/13/2023 – From Grain to Grain

Those who believe that an investment decision starts with the purchase are mistaken. Large investors initiate the decision by selling. That’s right. This is a lesson that renowned investors Warren Buffett and George Soros learned and use.

To explain how to make this decision, I quote the book Investments: The Secrets of George Soros and Warren Buffett, by Mark Tier, which explains six strategies that these two investors apply. This is an interesting, easy-to-read book that I highly recommend.

In fact, the book covers six strategies, but some of them are very similar so I grouped them together. Before presenting the strategies, let’s understand the relevance of these strategies.

Knowing how to sell is more important than knowing how to buy, because only in the future will we know if a purchase was successful or not. If we don’t know when to avoid losses or when to take profits, we will miss opportunities to either save gains or save equity.

Buying is easy, the art of investing is knowing the selling price, as it explains whether the purchase was successful.

Not all strategies are followed by both wealth managers. Soros has a more technical profile. Therefore, it uses models that are more characteristic of this profile and that are not necessarily observed by Buffett.

No matter what model or strategy each one uses, the golden rule is to follow their model.

Here are four strategies:

Sell ​​when model criteria is no longer met.
This criterion can be micro or macroeconomic. A microeconomic criterion is associated with financial aspects of the company and its sector. Changes in macroeconomic criteria are related to changes in the economy, for example, interest rates, inflation, exchange rates and economic growth.

This strategy is followed by both managers. The author cites the year 2000, when Buffett sold all his Disney shares. Buffett justified the sale by the change in the competitive characteristics of the company.

Something similar happened in 2020 when Buffett sold all of his aviation company shares. This was a relevant portfolio position that had suffered a sharp devaluation after the pandemic. Buffett sold even at a loss as he no longer believed in the industry’s outlook.

The lesson to be learned is that you need to have an economic and financial scenario for the company. If something changes from this scenario, you should assess whether the investment still makes sense.

Sell ​​when an event expected by the model occurs, when there is a warning from the model, or when the price target is reached.
Most individual investors buy stocks or assets for past returns and do not formulate an expectation of what the fair value of the investment is. In this way, when the investor invests the asset, it is often already expensive and there is no more gain to capture. Or the investor holds the asset beyond its fair value and misses out on the opportunity to make a bigger profit.

Also, investors, for not having a formulated model, do not understand the effect of events on the asset and how this can compromise the result of the investment.

Sell ​​when risk control rules are triggered.
I’ll make an analogy to explain. Consider a company that has machines running and there is a storm that causes short circuits. The company manager sees some machines breaking down because of the electrical problem. What would be the recommended decision for this manager: leave all the machines working and hope that others do not burn, or turn off the machines, try to identify the problem and, thus, prevent more machines from burning?

Your capital is like a set of money machines running. Every time you suffer a devaluation of capital, it’s a machine breaking down. Therefore, it is essential to have risk controls and respect these controls so that your operating capital continues to provide you with fortune.

Sell ​​when you realize you made a mistake.
This is one of the hardest. Assuming a mistake is not natural and hurts our ego. However, recognizing mistakes is critical to successful investing. I often tell my students that: the only sure thing about investing is that at some point you will be wrong. He is more successful in investments who discovers errors faster and corrects them.

Realize that an investment strategy to be systematically successful must be based on having a model that explains the investment from the purchase decision to the moment of sale, passing through the problems that may occur if this model or the expected scenario change or it is realized that they were wrong in the original conception.

Everyone, and possibly you, too, may have made a successful investment that didn’t require any planning. However, repeating this feat more often is only possible if you have models that justify the investments.

Michael Viriato is an investment advisor and founding partner of Casa do Investidor.

Talk directly to me via email.

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