If Warren Buffett Isn’t Afraid to Cut His Losses, Then You Shouldn’t Be Either

Although it isn’t a competition, many would consider Warren Buffett the Michael Jordan of investing, and for good reason. The Oracle of Omaha has invested his way to a $100 billion fortune (it was $120 billion in April 2022). But just as Michael Jordan has taken losses, so has Warren Buffett. Even with all the success Buffett has had in investing, he’s made many mistakes along the way.

When you invest in a stock, your plan should always be to hold it long term. Buffett himself once said, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” However, there may come a point where holding onto a failing stock may do you more harm than good, and you’re better off cutting your losses before they get worse.

Going against conventional wisdom

It’s not always easy to spot a failing business. If it was, nobody would invest in (or hold onto) them. However, according to Buffett, there are warning signs, including when a business is getting bad results while being run by great management. His position is that great management will never win over bad economics. Buffett’s company, Berkshire Hathaway, once owned a stake in all four major airlines:

Delta Air Lines (11%)
American Airlines (10%)
Southwest Airlines (10%)
United Airlines (9%)

Berkshire had paid between $7 billion and $8 billion for its stakes in the companies beginning in 2016, but it sold them for far less than that in 2020. Buffett himself took the blame, saying he was the one who made the decision. This short ownership stint goes against Buffett’s traditional philosophy of holding onto stocks long term, but it shows how sometimes going against conventional wisdom is a better business decision.

In the past five years, Delta stock has declined over 40%, American Airlines is down almost 75%, Southwest fell over 33%, and United has shed 49%. Does that mean airline stocks won’t bounce back? Of course not; they may make a great comeback, but that also doesn’t make them great investments either.

It’s always good to keep in mind the opportunity cost of money, which is the value you’re missing out on by having money in one investment instead of another. There’s no need to stay invested in a stagnant business when there are many other options likely to produce superior returns.

Selling can be a blessing in disguise

If you’ve truly lost hope in the potential of one of your investments, there’s no need to delay the inevitable. Having it in your portfolio can do more harm than good the longer you hold onto it. Selling a particular stock at a loss can have some benefits too because of tax-loss harvesting.

Just like capital gains increase your tax bill, capital losses can lower it. Any capital losses, up to $3,000, can either offset any capital gains you have for the year or lower your taxable income.

If you’re going to cut your losses short — which sometimes is the best option — you might as well get some tax relief for doing so.

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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares). The Motley Fool recommends Delta Air Lines and Southwest Airlines and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.