2002: How do you do decide when to hold forever and when to sell?

AUDIENCE MEMBER: Hello Mr. Buffett and Mr. Munger. My name is David Klein-Rodick from Lincolnshire, Illinois. Thank you for letting me ask the first question.

I wanted to say I am sorry for the loss of your friend Mrs. Graham last year.

My question is: you have said that your favorite time to own a stock is forever.

Yet, you sold McDonald’s and Disney after not owning them for long.

How do you do decide when to hold forever and when to sell?

And also, are you and Mr. Munger wearing Fruit of the Loom? (Laughter and applause)

WARREN BUFFETT: Charlie? (Laughter)

I think I better answer the question. I can answer unequivocally. I am wearing Fruit of the Loom.

I’m not sure whether Charlie wears underwear. Do you? (Laughter)

CHARLIE MUNGER: I haven’t bought any new underwear in a long time and therefore I’m inappropriately attired. (Laughter)

WARREN BUFFETT: He’s waiting for a discount, don’t let him kid you. (Laughter)

Well, the answer — it’s a very good question about selling. I mean, we — it’s not our natural inclination to sell.

And on the other hand — and we have held the Washington Post stock since 1973. I’ve never sold a share of Berkshire, having bought the first shares in 1962.

And we’ve held Coke stock since 1988. We’ve held Gillette stock since 1989. Held American Express stock since 1991.

We had actually previously been in American Express in the ’60s and Disney.

So, there are companies we are familiar with.

We generally sell by — we would sell if we needed money for something else — but that has not been the problem the last 10 or 15 years.

Forty years ago my sales were all because I found something that I liked even better. I hated to sell what I sold, but I also didn’t want to borrow money, so I would reluctantly sell something that I thought was terribly cheap to buy something that was even cheaper.

Those were the times when I had more ideas than money. Now I’ve got more money than ideas, and that’s a different equation.

So now we sell — really when we think that we’ve — when we’re reevaluating the economic characteristics of the business.

In other words, if you take the — don’t want to name names — but take a stock we’ve sold, of some sort.

We probably had one view of the long-term competitive advantage of the company at the time we bought it, and we may have modified that.

That doesn’t mean we think that the company is going into some disastrous period or anything remotely like that. We think McDonald’s has a fine future. We think Disney has a fine future. And there are others.

But we probably don’t think that their competitive advantage is as strong as we might have thought — as we thought it was — when we initially made the decision.

That may mean that we were wrong when we made the decision originally. It may mean that we’re wrong now, and that their strengths are every bit as what they were before.

But, for one reason or another, we think that the strengths may have been eroded to some degree.

A classic case on that would be the newspaper industry, generally, for example.

I mean, in 1970, Charlie and I were looking at the newspaper business. We felt it was about as impregnable a franchise as could be found.

We still think it’s quite a business, but we do not think the franchise in 2002 is the same as it was in 1970.

We do not think the franchise of a network television station in 2002 is the same as it was in 1965.

And those beliefs change quite gradually. And who knows whether they’re precise — you know, whether they’re right, even.

But that is the reason, in general, that we sell now.

If we got into some terribly cheap market, we might sell some things that we thought were cheap to buy something even cheaper, after we’d bought lots and lots of equities. But that’s not the occasion right now.

Charlie?

CHARLIE MUNGER: Nothing to add.

WARREN BUFFETT: He’s been practicing for weeks. (Laughter)