Warren Buffett: The Irrationality of Stop-Loss Orders in Investing

During the 1994 Berkshire Hathaway Annual Meeting, Warren Buffett recounts a conversation with NYSE specialist Jimmy Maguire about stop-loss orders on Berkshire Hathaway stock.

He expresses confusion over why some investors would set a stop-loss order to sell at $15,500 when they wouldn’t sell at $16,000, highlighting the irrationality of such decisions. Buffett notes that these orders suggest some shareholders are treating Berkshire as a trading vehicle rather than a long-term investment.

He compares this behavior to selling a house for less than it’s worth, emphasizing that such actions lead to unnecessary stock volatility.

Here’s an excerpt from the meeting:

Buffett: One of the things that was interesting to me, I don’t know whether it was three months ago or when, but I happened to be talking to the [NYSE] specialist, terrific specialist, Jimmy Maguire.

He had to leave, but he was here earlier in the session. And I think, at the time, the stock was around 16,000 or something like that. And he had some rather significant stop-loss orders on the books at 15-5, or thereabouts, involving some hundreds of shares.

And that to me is a signal that, you know, we have some people that are — in my view — are not really the kind of owners that we would like to attract. Because why somebody wants to put in an order to sell something for 15,500 that they don’t want to sell at 16,000 is beyond me, but — (Laughter) The idea of people using stop-loss orders with Berkshire, obviously — it tells me that we’ve got some people in that are using it as a trading vehicle of some sort, or have some totally noninvestment-type calculations in their mind.

I don’t think we have very many of them. But obviously, if we have enough people like that, you will have a more volatile stock than if you have a whole bunch of people who look at it as something that they’re going to hold for the rest of their life.

And the stock did go down at that time and hit 15,500. And there were — that — I think it was close to 300 shares, which is 4 1/2 million dollars’ worth of stock. And somebody made a decision, apparently, that they — or some small number of people — made a decision that they wanted to sell something at 15,500 that they could have sold for 16,000.

The lower it went, the better they liked it, apparently. I mean, the better they liked the sale. (Laughter) Which, you know, has always struck me as like having a house that you like, and you’re living in, and, you know, it’s worth $100,000 and you tell your broker, you know, if anybody ever comes along and offers 90, you want to sell it. I mean, it doesn’t — (Laughter) — make any sense to me.

You can listen to the entire meeting here: