Price on Value
December, 2000
Never Sell Your Stocks Again?
John Price, Ph.D.
Warren Buffett and other leading investors always talk about buying
stocks as if you were buying the whole company. "I always picture
myself as owning the whole place," Buffett said in 1994 in an
interview in the Omaha World-Herald. "And if management is following
the same policy that I would follow if I owned the whole place, that's a
management I like."
For Buffett there is no fundamental difference between buying stock in
a public company and buying the company outright. In both cases he applies
the same criteria relating to earnings strength and predictability,
management ability and long-term prospects. He also looks for companies
that he understands.
The second principle used by Buffett is to buy stocks as if he will be
holding them for the rest of his life. I think it is a little like getting
married. When you pop the question, your intention is that it is going to
be a marriage for the rest of your life. It might not end up that way, but
this is what guided your decision.
On a number of occasions Buffett has referred to himself as a "Rip
Van Winkle" investor, an investor whose "favorite time frame for
holding a stock is forever."
In the 1986 Berkshire Hathaway Annual Report, Buffett wrote that
"we expect to keep permanently our primary holdings, Capital
Cities/ABC, Inc., GEICO Corporation, and The Washington Post. Even if
these securities were to appear significantly overpriced, we would not
anticipate selling them, just as we would not sell See's or Buffalo
Evening News [companies fully owned by Berkshire Hathaway] if someone were
to offer us a price far above what we believe those businesses are worth…
Despite the enthusiasm for activity that has swept business and financial
America, we will stick with our 'til-death-do-us-part policy."
A few years later he added Coca Cola to his list of permanent stock
holdings.
If these are the criteria for buying stock-think like an owner and aim
for a permanent holding-what are the criteria for selling? In my
investment workshops, the question most commonly asked is how do you know
when to sell.
The idea of only buying with the intention of never selling is probably
too extreme for most people-including myself. Just the same, I do answer
the when-to-sell question by saying that you should "never
sell."
When I say that I can see the workshop participants thinking to
themselves that I have lost my mind and perhaps they should leave now.
After a suitable pause, I continue by adding, "you should not sell.
Instead, always think that you are transferring your assets."
Over and over I see people who sell their stock in a particular
investment and only after they have done so do they look around for
another investment. Yet in most cases they end up putting their money in a
stock that performs less well than the stock they just sold. In "One
Up On Wall Street" Peter Lynch refers to this as pulling out the
flowers and watering the weeds.
The decision process for selling a particular stock should include the
determination of what you are going to do with the money.
Whatever is your investing time frame, selling stock in a company only
makes sense if you already have a strategy that you believe will give you
a better return over this period. The strategy may be as simple as putting
the money under the mattress, or as risky as buying internet stocks, or as
middle-of-the-road as investing in an index fund. Or it may involve other
stocks or even real estate.
When you weigh it all up, taking into account the riskiness of your
next investment, you want to choose the strategy that will give you the
maximum amount of wealth at the end of your investing time frame, whether
it be a few minutes, a few years, a few decades, or even a few lifetimes
if you are into creating a family dynasty.
If your time frame is ten years, then the old maxim of "you can
never go wrong taking a profit" makes little sense. What counts is
how well you do over ten-year periods and not some short-term successes,
no matter how spectacular they may be.
While you are at it, give up all those other rules that make you
consider stocks as isolated investments. They are like classical physics
compared to quantum physics. Sell whenever the stock doubles, sell when
its price drops by 7 percent are examples of looking at the world as being
made up isolated, separate objects. Think of all possible investments as a
total package. Your job is to invest in a small number of these, those
that you think will give you the best return. When your analysis shows
that one of the other investments will do substantially better, then move
some of your funds to it.
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One of the reasons that I developed my software Valuesoft
was deal with the problem discussed in the article, how to decide when to
sell stock in one company and to buy in another. In next month's article I
will look at investing issues such as volatility and management decisions
that give us the most anxiety and how we might deal with them.
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