Don't Sell This Stock. Ever.

Legendary investor Philip Fisher bought a little radio company called Motorola (NYSE: MOT  ) in 1955 and pioneered a revolution. The guy did his homework, exercised a good deal of discipline, and found himself with a stock that multiplied many, many times -- all while sitting on his butt.

Sounds pretty nice, eh?

In today's volatile and troubled market, taking your hands off the wheel is probably the last thing you want to do. And just like you, I fight that same fear. But that's precisely why right now is the best time to find a great company, invest in it, and then sit on your butt -- instead of fretting, trading, and losing sleep.

Good story, but how?
I've written before about the decision to chuck your stocks into the wastebasket. But that advice may not be entirely helpful -- what you really need is to avoid the kinds of stocks that put you in that situation in the first place. After all, if you're in a situation where you have to sell a stock because it has problems, it's too late.

To get around that problem, you need to get to know a man buried in an obscure cemetery in the Kreuzberg section of Berlin, Germany.

Man muss invertiren, immer invertiren
In case your German is a bit rusty, the expression translates to "One must invert, always invert." It's credited to the mathematician Carl Gustav Jacob Jacobi, who taught us to make a habit of reversing difficult equations to arrive at the solutions behind them.

Let's take Jacobi's idea and apply it to our current situation.

Instead of thinking about when to sell, perhaps the more intelligent question to ask is the inverted one: When should we never sell? The answer leads us to the "sit on your butt" philosophy that has worked so well for many of history's finest investors.

If we can identify a few businesses that investors should have never sold, we can work backward to extract a few salient characteristics and then use them in our search for the next never-sell investment.

History's lessons
Case No. 1:
Berkshire Hathaway (NYSE: BRK-A  )
Overall return, 1964-2007: 400,863%
Lesson: Top-flight management

Of all of the advantages that Berkshire Hathaway has going for it, the most obvious begins with two men: Warren Buffett and Charlie Munger. Without them, Berkshire would probably be a now-defunct textile mill. With them, it's been an absolute powerhouse of an investment … which goes to show: We should absolutely demand fantastic management.

Case No. 2: Altria (NYSE: MO  )
Return, 1970-present (including dividends): 103,800%
Lesson: Undeniable consumer-facing trends

Regardless of how you feel about Big Tobacco, you have to admit that Altria is so successful because it runs a business built on a fundamentally consumer-driven -- and highly addictive -- product. Plenty of other great companies display similar characteristics -- Coca-Cola (NYSE: KO  ) ring a bell? We definitely want a business that appeals to consumers' most basic interests.

Case No. 3: General Electric (NYSE: GE  )
Return, 1962-present (including dividends): 14,311%
Lesson: Agility

Not all companies need to innovate to be great, but the vast majority need to be able to read the market, react, and be ahead of long-term trends. GE definitely has those things going for it; I'd venture to say that McDonald's (NYSE: MCD  ) displays a similar ability to adapt. Let's invest with companies that can zig and zag, when others have cement feet.

Case No. 4: Amazon.com (Nasdaq: AMZN  )
Return since going public in 1997: 4,588%
Lesson: Scalability

We want businesses that can take on new customers without needing to seriously build out their existing operations. Amazon is a perfect example. Reinvestment is costly -- so identify businesses that don't require much of it to scale up the top line.

If you combine these four qualities and find a few stocks that fit the mold, you're probably onto something seriously good. I'd argue it's most likely a company to buy early, buy often, and never sell.

So what now?
We can do two things with this information:

  1. Use it as a further tool to understand what stocks we need to sell now. (Talk about inverting!)
  2. Use these principles to buy stocks that we'll never, ever need to sell. That's where sitting on our butts comes in.

It's not mere coincidence that most of the world's best investments fall within one of these four categories (many of them share more than one). Nor is it a coincidence that great investors constantly search for these combinations -- as you should, too.

We employ a similar philosophy at The Motley Fool's Stock Advisor service. And it's worked for us thus far: Since our service's inception in 2002, we're beating the market by 41 percentage points. If you like the concept of crushing the market while sitting on your hands, click here for a free 30-day trial to our service. It's risk-free.

Stock Advisor analyst Nick Kapur often tries to invert while snowboarding -- but he generally winds up just sitting on his butt. Amazon and Berkshire are Stock Advisor recommendations. Berkshire is also an Inside Value selection. The Fool owns shares of Berkshire Hathaway and has a full disclosure policy.


Read/Post Comments (27) | Recommend This Article (116)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 23, 2008, at 4:01 PM, LouieJunior wrote:

    I'm skeptical about Amazon's scalability. Many bulls go on and on about the company's revenue growth and believe there is no end in sight. They think it will take business away from WalMart and the rest of the brick and mortar world. They believe third-party sellers and start-up companies will be flocking to Amazon to sell their wares and widgets. They get dizzy imagining the day when everything in the world is bought and sold on Amazon.com -- even groceries!

    Well, Amazon has grown and continues to grow its top line. The growth has even accelerated recently. But the net income remains ugly. Amazon has to keep expanding its selection, discounting prices in order to keep sales growing. They also have to eat the shipping on a high percentage of their goods. So, in reality, all they are really doing is collecting money for UPS and FedEx!

    Shouldn't economies of scale yield higher margins with higher traffic and higher revenues? Instead, Amazon's operating margins, after showing some strength a year ago, have resumed their long-term decline. Another way to look at this is to recognize that seven (7) $2B stores would be more profitable than Amazon.com, which has $14B in sales. So, what's the purpose of being so big?

    http://bp3.blogger.com/_Q5i639obEvM/SFQI8zUuzfI/AAAAAAAAAEg/...

    One would expect inventory to grow with sales but this company's inventory is growing much faster than revenues -- another effort to keep revenues growing. Amazon has always been able to turn inventory faster than it pays for it -- giving it a negative working capital! But this benefit will evaporate as product selection becomes too bloated to turn.

    http://bp1.blogger.com/_Q5i639obEvM/SFQV6QvWlMI/AAAAAAAAAEw/...

    Also, service disruptions and outages indicate Amazon's infrastructure complexity has grown out of control. Bulls thought amazon wouldn't require big investments to increase scale -- in contrast to brick and mortar operations which must purchase real estate and build stores. The opposite will prove true. The servers will depreciate and become obsolete rapidly while the brick and mortar real estate appreciates throughout the company's life cycle.

    My 12 month target price is $48.00

  • Report this Comment On June 23, 2008, at 5:20 PM, AnEvenBiggerFool wrote:

    I was interested to see your case begin with the example of Motorola, and was eager to hear your view of the company. But that was the end of mention of Motorola.

    Long ago, my traveling salesman dad bought stock in Motorola, one of his products, and it ultimately became a valuable nest egg. When it's price was at it's highest, my mom asked shouldn't we sell? But too much was going on with a family crisis, and there was too much sentimentality associated with the stock. So I punted the decisions, despite my misgivings on a hair-brained satellite concept by Motorola, Iridium. Since then, Motorola stock has dropped to a small fraction of its high.

    So, what I'd really like to know is your assessment of Motorola's future prospects, by the criteria discussed in your article, or by any other approach.

    Thanks.

  • Report this Comment On June 23, 2008, at 10:29 PM, Valuecruncher wrote:

    We think that GE in particular looks cheap right now:

    http://seekingalpha.com/article/82295-valuing-ge-it-s-cheap?...

  • Report this Comment On June 24, 2008, at 2:57 AM, Jorler wrote:

    Just a little note:

    YOUR German may be rusty too!

    "invertiren" normally has another E: invertieren

    Best regards

  • Report this Comment On June 24, 2008, at 7:18 AM, clairchen wrote:

    Yes, but it was spelled "invertiren" in the 19th century (when Jacobi lived).

    Better regards

  • Report this Comment On June 24, 2008, at 9:34 AM, JGBFool wrote:

    I found Boo2007's comment to be a little hard to follow. Google Translate wasn't much help, either.

  • Report this Comment On June 24, 2008, at 4:37 PM, DoctorData100 wrote:

    I would certainly also like to hear your view on Motorola.

    As a former employee and investor in Motorola I find the deroute that Motorola has taken very sad.

    From being a great company it now looks like there is no end to its missery.

  • Report this Comment On June 24, 2008, at 10:43 PM, robr0001 wrote:

    Motorola is dead.

    1. There butt is officially kicked in the handset market, and all indications are there is nothing in the pipe that can save them. Everybody forgets that they had to give up all their intellectual property in 2008 (7 year agreement 2001-2008) to the Chinese government when they let them set up manufacturing there. Just plain foolish. Now not only can they not compete in Asia (where incidentally they have never done very well), they cant even compete in the U.S. and European markets because they contract out all of their manufacturing to Foxconn (another Chinese company) who they also compete with. It is impossible to keep a secret when your competition also manufactures your products. How could you ever hope to get to market first?

    When confronted with this, management arrogantly stated that the market was so large that this wouldn't make a difference. Looks like they were wrong. Foolish and arrogant.

    They have split this division for a reason people.

    2. Canopy products are ok, but the economy and cheaper just as functional products, coupled with an overall lack of sales are killing it.

    3. Police radio's and government have always had woefully low margins. Cant make a living just off of that.

    4. Set top cable boxes are now being built directly into TV's. Whoops they dont make TV's anymore!

    5. Sold the chip division. Couldn't compete.

    6. Modems??? Anybody can make modems and everybody does. No margin there.

    Whats left? Zip.

    A great company ruined by arrogance, thievery, and greed.

    The point of no return was about a year ago.

  • Report this Comment On June 24, 2008, at 10:51 PM, robr0001 wrote:

    Motorola is dead.

    1. There butt is officially kicked in the handset market, and all indications are there is nothing in the pipe that can save them. Everybody forgets that they had to give up all their intellectual property in 2008 (7 year agreement 2001-2008) to the Chinese government when they let them set up manufacturing there. Just plain foolish. Now, not only can they not compete in Asia (where incidentally they have never done very well), they cant even compete in the U.S. and European markets because they contract out all of their manufacturing to Foxconn (another Chinese company) who they also compete with. It is impossible to keep a secret when your competition also manufactures your products. How could you ever hope to get to market first?

    When confronted with this, management arrogantly stated that the market was so large that this wouldn't make a difference. Looks like they were wrong. Foolish and arrogant.

    They have split this division for a reason people.

    2. Canopy products are ok, but the economy and cheaper just as functional products, coupled with an overall lack of sales are killing it.

    3. Police radio's and government have always had woefully low margins. Cant make a living just off of that.

    4. Set top cable boxes are now being built directly into TV's. Whoops they dont make TV's anymore!

    5. Sold the chip division. Couldnt compete.

    Whats left? Zip.

    Sell now and lick your wounds. It cant be fixed period.

    A great company ruined by arrogance, thievery, and greed.

  • Report this Comment On June 24, 2008, at 11:35 PM, none0such wrote:

    @robr0001

    Foxconn is a Taiwanese company not a Chinese company - they were the first to move into Shenzhen and the first to start moving out of Shenzhen. Furthermore, they have operations in South America and Eastern Europe as well as the United States so they compete with other OEM businesses in all markets. I think Motorola was poorly managed and its brand name tarnished. Foxconn was brilliantly managed and has added value to the brand names of their clients.

  • Report this Comment On June 25, 2008, at 8:08 AM, robr0001 wrote:

    Not knocking Foxconn. Great company but low margins.

    It's their customer I have a problem with.

  • Report this Comment On June 25, 2008, at 11:46 AM, afamiii wrote:

    Good article, though I'm not sure about agility and scalability, certainly good qualities to have, but hardly why those companies have outperformed. I would have penned it as:

    1.Top Flight Management (Berkshire, GE)

    2.Undeniable comeptitive advantage

    a.Undeniable Consumer Bond (Altria, Coca-Cola, McDonald's)

    b.Undeniable superior leadership culture – producing leaders (Procter & Gamble, GE)

    c.Undeniable ability to innovate (Apple, 3M)

    d.Undeniable technical leadership (Intel)

    e.Undeniable cost leadership (Walmart)

    f. Undeniable other competitive advantage (e.g. relevant patent generation ability, distribution network)

    3.Leader in a winner takes all industry (Microsoft, Amazon, Ebay, Loop)

    www.smartinvestorafrica.com fool on

  • Report this Comment On June 25, 2008, at 1:47 PM, mdtopper wrote:

    I think the point made about virtual company's being more likely to incur ever rising costs than a brick and mortar one is a good one. Can anyone evaluate the scale of the difference? So you save the cost of buying and owning the real estate but have to spend to constantly upgrade technology. Is it a wash?

  • Report this Comment On June 25, 2008, at 1:49 PM, mdtopper wrote:

    @afamiii

    so why is GE's stock price virtually unchanged in many years?

  • Report this Comment On June 25, 2008, at 2:17 PM, Investorlion wrote:

    "Top flight management" : Berkshire's management is considered top flight now and maybe in the past 15-20 years. If you go back to 1977 or 1980, it would have been hard to figure that out. And only that (investing back in the 70's in BRK-A) would give you the 400,000% yield.

    This article addresses good points, but is way too exaggerated.

  • Report this Comment On June 27, 2008, at 9:37 AM, WPThatcher wrote:

    There is no lesson about the importance of "top flight management" that one can glean from Berkshire. It's nearly impossible to find a person who is both a brilliant investor and CEO.

  • Report this Comment On June 27, 2008, at 3:46 PM, UncleSkell wrote:

    Yes, but how much would Berkshire Hathaway be worth tomorrow if Messrs. Buffett and Munger got hit by a bus this afternoon? If that sounds outlandish, recall Cantor Fitzgerald on September 10, 2001.

    The lesson is not just that "top flight management" is important, but that, like anything else, it works best if nothing bad happens to the managers.

  • Report this Comment On June 27, 2008, at 10:10 PM, Montana683 wrote:

    Hello Everyone

    Not to sound foolish but are they recommending that we keep Motororla? Or ios it another stock?

  • Report this Comment On June 28, 2008, at 6:00 AM, DeftlySpun wrote:

    I subscribe to 2 MF services. I understand the folks at The Motley Fool are running a for profit business and am used to their informative articles being in fact infomercials. I am also, however, used to those infomercials imparting at least a dribble or two of useful info. This one though truly does fail miserably in that regard. In fact it is quite bald faced in its disregard for anything other than being an advertisement. The title, "Don't Sell This Stock. Ever," quite definitely leads you to believe they are going to talk about a given stock. But it doesn't. I defy anyone to clearly identify which stock it is we are to never sell.

    I guess what I'm saying is I can be patient with the infomercials disguised as legitimate investment dialog as long as there is something useful imparted. As long as I’m not being lied to. “Don’t Sell This Stock. Ever,” tells me there is a serious discussion in the offing. I read it and find I’ve been lied to. That I don’t like. This infomercial is disappointingly raw. Once read it is obvious that it is meant only to rope you into looking at a product with no intention at all of being a serious or helpful discussion.

    Maybe it is time to say goodbye to MF. I’ve been a follower for MANY years and have seen the business develop. Please guys. Step back and rethink what you are doing. I have always felt secure when receiving in your products and taking them seriously. You are making it hard to keep doing that.

  • Report this Comment On June 28, 2008, at 12:34 PM, shouldI wrote:

    I find MF's articles harder to read

    than ever. ie: "Never sell this stock".

    Also way too much pontificating.

    Just say what you mean guys.

  • Report this Comment On June 28, 2008, at 3:59 PM, orthello wrote:

    I agree with Deftlyspun, MF gives you teasers with the title and leaves you with an ad. Oh, the good old days.........

  • Report this Comment On June 28, 2008, at 8:41 PM, Ruthie203 wrote:

    Sorry fellows, I tend to agree, too much pontificating indeed. This site does a lot of recommending and little backup of that recommendation. Some of their picks are outright horrible.

  • Report this Comment On June 29, 2008, at 5:54 PM, martib123 wrote:

    I agree wholeheartedly. The MF headlines promise alot and never deliver especially after reading a lengthy article (infomercial) It builds up to nothing. It doesn't even slice and dice!

  • Report this Comment On June 30, 2008, at 1:10 AM, dsnvst wrote:

    Scalability,Agility are direct attributes of management,as is, to an extent, being in businesses that are 'consumer -facing trends';which, incidentally, is a very inexact phrase for big tobacco. Good management attracts good people, sometimes even better people; and this keeps the torch flaming over long periods of macroeconomic ups and downs.Unfortunately, management is uncovered from good press - sure, we will all hail Steve Jobs as long as Apple rides high, but do you remember Netscape pioneer Jim Clark.? It got kicked by IE but Microsoft has hardly been good for investors. For this reason alone, holding any stock forever, and profiting on the day you have to sell it, is very low probability. About the same as your sales pitch.

  • Report this Comment On June 30, 2008, at 4:19 AM, bobetro wrote:

    Dear MF, I suspect I'll do better reading your advise and going the other way.

    Let me refresh: 2007 buy: NUAN , NTGR, PRAA, NCT, RAS, HPY, TONE.

    (CHK, UNT did well only in 2008).

    and then - JYHW, CBG, NILE, NTRI, PTRY, BBBB, DWSN.

    In 2008 we were to short RIMM, CRM, NFLX, MSFT....

    and grow with FDX, CTRP, BBY, GE, C, CROX...

    and now Motorolla and GE.

    Can you do better than ?

  • Report this Comment On June 30, 2008, at 4:29 AM, bobetro wrote:

    JGBFool

    Boo2007 says smth like: Good brands command extra sales margins, even if they are not selling their own goods (the latter may have consequences in the long run). One can keep such stock only for the brand name, even if not .....(producing extra results ??)

  • Report this Comment On June 30, 2008, at 9:24 AM, SkeeDaddy wrote:

    The purpose of the "pontificating" headline is to attract attention so you'll read the article. It's a common journalism ploy to SELL something....in this case, MF's "Stock Advisor".

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