From the second-quarter 2014 newsletter of David Wendell Associates, Portsmouth, N.H.
“If the job has been correctly done when a common stock is purchased, the time to sell it is — almost never.”
— Philip A. Fisher, Common Stocks and Uncommon Profits, 1958
With the major market indices continuing to reach new highs, some investors are wondering if they should sell their stocks. After all, if prices are high and the holdings have been profitable, why not sell and take the gains?
On Wall Street, the predilection to sell can be especially prevalent. Many brokerage and research firms publish price targets for stocks and recommend selling them once the target has been reached. Other firms routinely recommend moving to all-cash positions based on market, macroeconomic or geopolitical forecasts. Still others view stocks as little more than trading vehicles and move in and out many times over the course of a month, week, day or microsecond, as in the case of high-frequency traders.
At the other end of the spectrum are investors who never sell at all, such as the “Coffee Can Portfolio” discussed in our third-quarter 2012 newsletter. In an article published in 1984, author Robert Kirby described a situation where his purchase recommendations were followed but his sell recommendations were ignored. After many years, the result was an odd assortment of small holdings, several large holdings and one jumbo holding of Haloid which “later turned into a zillion shares of Xerox.” Kirby, of course, had recommended that Haloid be sold.
In our firm, our analytical work focuses on the underlying businesses of the stocks we recommend for purchase. We think of our clients as part-owners of those businesses and, as long-term investors, we encourage our clients to own the shares for as long as the company’s management team is doing its job to increase shareholder value. Given enough time, a company’s share price is likely to increase along with growth in its revenues, earnings and dividends.
However, companies can change and industries evolve, and management teams can lose their way. Sometimes better opportunities develop elsewhere. …
At the end of the day, investors are well-served if the job of analyzing a company includes a thorough review of its underlying business and fundamental characteristics — this holds true for selling and buying. If the company selected for purchase passes muster on all counts, it could be a long time before it needs to be sold. And selling a high-quality, adeptly managed company just to take profits rarely is a viable long-term investment strategy.
“If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.”
— Benjamin Graham, The Intelligent Investor, 1949
