Legendary investor Philip Fisher bought a little radio company called Motorola 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 we're looking at a historically discounted market. And 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
Return, 1964-2007: 252,300%
Lesson: Top-flight management
Of all of the advantages that Berkshire Hathaway has going for it, the most important begins with two men: Warren Buffett and Charlie Munger. Without them, Berkshire would probably be a now-defunct textile mill. Instead, the pair have made prescient investments in long-lasting businesses like Procter & Gamble
Case No. 2: Altria
Return, 1970-present (including dividends): 84,800%
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. I would argue that today, Apple
Case No. 3: IBM
Return, 1962-present (including dividends): 3,670%
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. Having been many different things over the course of its life, IBM definitely has the ability to adapt going for it. I'd venture to say that Apple displays a similar ability. Let's invest with companies that can zig and zag, when others have concrete feet.
Case No. 4: Microsoft
Return since IPO in 1986: 25,170%
Lesson: Scalability
We want businesses that can take on new customers without needing to seriously build out their existing operations. Microsoft is a perfect example. Reinvestment is costly -- so identify businesses that don't require much of it to ramp up the top line.
If you combine these four qualities and find even 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:
- Use it as a tool to further understand what stocks we need to sell now. (Talk about inverting!)
- 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, especially in these turbulent markets.
We employ a similar philosophy at The Motley Fool's Stock Advisor service. And it's worked: Since our service's inception in 2002, we're beating the market by 39 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.
This article was originally published June 23, 2008. It has been updated.
Stock Advisor analyst Nick Kapur often tries to invert while snowboarding -- but he generally winds up just sitting on his butt. He owns shares of Microsoft. Microsoft, Costco, and Berkshire are Inside Value recommendations. Costco, Berkshire, and Apple are Stock Advisor selections. Procter & Gamble is an Income Investor pick. The Fool owns shares of Berkshire Hathaway and Procter & Gamble and has a full disclosure policy.
