Selling is the more difficult part of investing than buying. Holding on is even harder.
Phil Fisher had a philosophy around selling — or rather, not selling — that may be helpful to more than his stock-picking fans. But first, a little background.
Fisher was the original long-term investor. He just did it in a very highly concentrated way, a side effect of his strategy.
He’s the guy that influenced Warren Buffett’s transition from Ben Graham’s buying companies at a wonderful price to Buffett’s wonderful companies at a fair price. The key change was essentially paying a higher multiple (but still undervalued price) in exchange for a longer runway.
That last bit is key.
Fisher’s philosophy is built on finding the handful of companies that can grow at a sustainably high rate over long periods of time. While the typical Graham investment might have a holding period of one to three years, Fisher’s was decades.
The difference in holding periods hints at the prevalence of opportunities for each strategy. Graham had a small steady supply. Fisher’s were rare.
So when it came time to sell, Fisher’s response was hopefully never. Not even if the stock gets “expensive.” His investment in Motorola is a great example:
If you are in the right companies, the potential rise can be so enormous that everything else is secondary. Every $1,000 I and my clients put into Motorola in 1957 is now worth $1,993,846 — after all the ups and downs of the stock and of the market…
If I’d sold Motorola because I thought it was overpriced 10 or 15 years ago, chances are I would not have known when to get back in, and I would have missed a tremendous profit. If one of my stocks gets overpriced, I warn my clients that things may be unpleasant for a little while but it will rise to a new peak later.
That’s over a 20% annual return on his Motorola purchase.
And there’s the rub. Companies that grow at a high rate of return, have stocks that earn a high rate of return.
Great companies, that can sustain high growth rates, trade at a premium. They’re rare. The demand for high future growth commands a higher multiple.
However, sometimes shifts in demand can throw prices out of wack but because high compounders are so rare, there are only a few reasons to sell:
If I have a deep conviction about a stock but it has not performed after three years, I will sell it. If I think management or the basic situation has deteriorated, I will sell.
If the only thing that’s changed for the business is the stock price, selling a rarity makes no sense. It’s better to hold on and suffer a little bit than to sell and miss the compounding potential.
The price still matters (more so when buying than selling), but only at the extremes. Otherwise, the opportunity lost in selling a compounder is too high because the real benefits of compounding come at the tail end of a really long run. Selling Motorola “10 or 15 years” early because it’s “overpriced,” meant missing out on the compounding effect of a 20% return over the full 40 years.
Now, if it only took a rearview mirror to find these gems.
Fisher was brilliant and had patience and guts. He held a handful of stocks for 15 to 20 years (longer in some cases) despite huge swings in price. He had clients that bought in. He had an above-average ability to avoid the typical tendencies that trip up other investors. So difficult is an understatement.
The more important takeaway is that over decades, a stock will earn a similar return as the business earns. A basket of businesses with sustainable high growth rates have stocks that compound at a similar rate. And selling early can be costly.
Conveniently enough, a basket of stocks, whose businesses grow at a similar rate to the market average will earn a market return. Barring some material change in those businesses, the price swings should be ignored, aside from extremes. Long-term investors should focus on what matters: business growth not price swings.
This post was originally published on January 17, 2020.
The Money Men, Forbes 1996