Selling a Stock to Buy a Stock; What Panic Really Looks Like

Navigating tough decisions in volatile markets

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Selling a Stock to Buy a Stock

It can be frustrating to see market opportunities and not have sufficient cash on hand to buy them.

In that case, selling an existing holding is your best option. That’s behaviorally difficult to do, especially if you’re selling that stock for a loss. Even worse is if you think the stock you’re selling is also undervalued.

That happened in my portfolio this week. It wasn’t easy to do, but I think I’ll look back five years from now and be glad that I made that decision.

Photo by Caleb Jones on Unsplash

In fact, having to sell a stock to buy a stock can force you to be more disciplined than usual and more intentional about your action.

Here’s Warren Buffett from the 1994 Berkshire Hathaway meeting:

If we have a lot of money around, we are a little dumber than usual; it tends to make you careless. I would say that the best purchases are usually made when you have to sell something to raise money to get them, because it just raises the bar a little bit that you jump over in the mental decisions.

The reason is opportunity cost. If you’re earning 3% on cash, a projected 10% return from a stock seems preferable. The bar for making that decision isn’t very high.

However, if you need to sell a stock with an estimated 10% annualized return to buy something else, you need to be confident that the alternative is better both in probability and payoff.

In periods of market volatility like we have today, it’s easy to wish you had more cash on hand, but that doesn’t mean your hands are tied from capitalizing on good opportunities. It just requires more consideration of opportunity costs and an acknowledgement of the behavioral barriers of selling a stock for perhaps less than you paid for it.

As I wrote last week, it’s useful to re-underwrite your portfolio and quantitatively rank your holdings by conviction. Then compare those scores against your estimated discount to fair value. The combination of low conviction and limited upside tells you which stocks should be the first to go if you need cash.

What Panic Really Looks Like

One of the articles from the financial crisis that I keep around was published on March 6, 2009 - the day the U.S. markets bottomed.

It’s a Los Angeles Times article titled, “Panicked by the Stock Market”. In it, the author describes how over the previous year he had moved his 401(k) out of equities and into cash. Too slowly, in his opinion.

A few weeks earlier, he sold even more as the market further declined. He explained:

“I realize that I have come late to the panic mode, but as my father always said: No matter how bad you have been burned, it is never too late to try dousing yourself with water.”

Just as was the case with the recent sell off, well-intentioned financial writers, advisors, and investors during the financial crisis encouraged people to stay the course and maintain a long-term view.

But the market kept falling.

The author acknowledges this advice, but concludes:

One thing that encourages me to panic is the steady cascade of admonitions from luminaries urging me not to panic…

I know that your intentions are honorable and that you’ve got loads of experience in this field. But right now, I’m no longer accepting advice from employees of the White Star Line. There is a time for hysteria, and a time when cooler heads should prevail.

This is the time for hysteria.

To be sure, when he was writing was no ordinary drawdown. On the day the article was published, the market was in a 51% drawdown from its previous high.

By comparison, at the worst point last week, we had a 19% drawdown.

Source: Koyfin, as of April 12, 2025. Flyover Stocks readers can get a special offer from Koyfin by clicking here!

My guess is that most equity investors are mentally prepared for a 20% drawdown, maybe even 30%, but opening up your 401(k) balance to see half of your money still there is likely to induce panic and a search for the water bucket.

The article is a brilliant illustration of what real market panic and hysteria looks like: when all the traditional advice seems to be wrong and the market keeps selling off, when your 401(k) balance keeps declining, when your family’s financial security is in jeopardy.

To be clear, none of this is meant as a knock on the writer and I’m grateful that he shared his experience. I hope he got back into the market shortly thereafter.

That period was the closest to the proverbial “blood in the streets” that I’ve seen in my career. I hope to not see it again.

Stay patient, stay focused.

Todd

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Todd Wenning is the founder of KNA Capital Management, LLC, an Ohio-registered investment advisor that manages a concentrated equity strategy and provides other investment-related services.

At the time of publication, Todd, his immediate family, KNA Capital Management, LLC and/or its clients owned shares of Berkshire Hathaway.

Please see important disclaimers.