The Beginner’s Guide to Investing

Here's how Warren Buffett decides whether or not to sell a stock when he gets bad news

Warren Buffett
David A. Grogan | CNBC

Even when press turns negative or the markets drop, Warren Buffett doesn't dump his holdings in a company. "The stock market is not there to instruct me, it's there to serve me," Buffett told CNBC's Becky Quick during an interview on "Squawk Box" on Monday.

The topic arose when Quick asked Buffett a viewer's question about Kraft Heinz. A few days before their conversation, Kraft Heinz, one of Berkshire Hathaway's largest holdings, had missed on its earnings expectations and disclosed that it had received a subpoena from the SEC. After that news broke, the company's stock plunged 30 percent and Berkshire Hathaway's stake dropped in value by more than $4 billion.

But although Buffett has admitted that "we overpaid for Kraft," he told Quick he has no plans to sell his stake in the company. His practice is to keep his focus on, and evaluate, the company overall. "If there's bad news and the stock goes down, the question I have is: Is the long-term valuation changed?" he says.

It's possible to recover from a setback. The key thing, Buffett says, is "you gotta make sure that it's still a fundamentally good business."

How Buffett invests

The Oracle of Omaha takes a pragmatic approach to investing decisions. Before handing over any money, Buffett lays out the facts about the company he's interested in. "You have to be able to play out your hand under all circumstances," he told shareholders in 2006.

"But if you can play out your hand, and you've got the right facts, and you reason by yourself, and you let the market serve you and not instruct you, you can't miss."

And although Buffett controls investments worth billions of dollars, nearly anyone can copy his tactics.

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First, gather your facts. Next, learn how to dissect them to find the pertinent information you need to make your decision. For Buffett, that means looking for the pieces that are "important and knowable."

"If something's important but unknowable, forget it," he says. "I mean, it may be important whether somebody's going to drop a nuclear weapon tomorrow, but it's unknowable."

Focus on the variables that you do have at your disposal. Once you've narrowed down your information, "then you decide whether you have information of sufficient value that — compared to price and all that — will cause you to act," Buffett explains.

Whether or not you choose to invest in something should be based on your research, not on your reaction to what other people are doing and saying. As Buffett puts it, "what others are doing means nothing."

That's why Buffett recommends doing your homework beforehand and investing in solid companies that will last, rather than trying to time the market or react to your anxieties. Concentrate on the facts, not how you're feeling.

"Don't watch the market closely," he told CNBC in 2016 amid wild fluctuations. "If they're trying to buy and sell stocks, and worry when they go down a little bit … and think they should maybe sell them when they go up, they're not going to have very good results."

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