Don't Sell This Stock. Ever.

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 rear.

Sounds pretty nice, eh?

In today's volatile and troubled markets, 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 you should be considering it right now. Today may just be the single 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
Overall return, 1964-present: 362,000%
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 has been an absolute powerhouse of a company, investing in greats like Wal-Mart (NYSE: WMT  ) and Johnson & Johnson (NYSE: JNJ  ) ... which goes to show: We should absolutely demand fantastic management.

Case No. 2: Walt Disney (NYSE: DIS  )
Return, 1969-present (including dividends): 45,300%
Lesson: Undeniable consumer-facing trends

You may not love cartoons, but I'm willing to bet that a good deal of the young people around you do. The genius of Disney is that it was able to capture and monetize the imagination of children throughout the globe. That's an undeniable consumer trend that Disney actually created and will likely be around for a long time. The lesson? We definitely want a business that appeals to consumers' most basic interests.

Case No. 3: Cisco (Nasdaq: CSCO  )
Return, 1990-present (including dividends): 30,400%
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. Cisco has had to adapt to a shifting marketplace numerous times and especially throughout the collapse of the dot-coms. The company is definitely agile. I'd venture to say that IBM (NYSE: IBM  ) has demonstrated a similar ability to react to market changes and adapt. Let's invest with companies that can zig and zag when others have cement feet.

Case No. 4: Google (Nasdaq: GOOG  )
Return since going public in 2004: 500%
Lesson: Scalability

We want businesses that can take on new customers without needing to seriously build out their existing operations. Google is a perfect example, as are other software manufacturers like Microsoft (Nasdaq: MSFT  ) . 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 tool to further 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 more than 40 percentage points. The market is in serious turmoil these days, but you can lay the foundation of future financial success today with a few smart investments. Click here for a free 30-day trial of our service. It's risk-free.

This article was originally published on 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 Walt Disney. Walt Disney and Berkshire are Stock Advisor recommendations. Google is a Rule Breakers recommendation. Berkshire, Wal-Mart, and Microsoft are Inside Value selections. Johnson & Johnson is an Income Investor choice. Motley Fool Options has recommended a diagonal call on Microsoft. The Fool owns shares of Berkshire Hathaway and has a full disclosure policy.


Read/Post Comments (6) | Recommend This Article (31)

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 January 10, 2010, at 1:56 PM, mystro125 wrote:

    As a long time holder of MSFT, CSCO, DIS, JNJ and KO I'd have to agree that simply holding these superior companies can be financially very rewarding. However, your patience will be tested as each of these stocks go through periods of under performance. My philosophy is to simply follow my holdings and if I experience crazy valuations i.e. CSCO in 2000 I'll sell a majority of the position. Remember, you can always buy it again as I did in 2002

  • Report this Comment On January 10, 2010, at 2:01 PM, mystro125 wrote:

    Holding superior companies will produce satisfying performance but your patience will to tested as there are periods of time when even great companies under perform the market. This means monitoring your positions and selling when things get crazy, i.e. Cisco in 2000. Remember you can always buy it again.

  • Report this Comment On January 10, 2010, at 4:07 PM, go4buffs wrote:

    ...nice article, but my German is not as rusty as yours ;-)

    I think you meant: Man muss invertieren, immer invertieren. You need the extra 'e' in invertieren.

    Sorry for the detail...

  • Report this Comment On January 10, 2010, at 10:27 PM, jimmicks wrote:

    Love the articles and would sign up for the Stock Advisor in a heartbeat, except for one thing....

    "Your subscription will automatically renew at the then current price."

    I refuse to sign up for anything with "automatic renewal".

    The only thing worse is early termination fees.

    I'll just keep reading the available info.

    Thanks

  • Report this Comment On January 11, 2010, at 1:38 PM, Ironbob wrote:

    Oh my! I would never have known to invest in Berkshire Hathaway, Disney, Cisco or Google!! Um, one thing this doofus has completely left out--YIELD!

    Sorry, but very few people have 100K laying around to buy a share of Berk. Duh.

    You don't invest in JNJ just because it has good management! You invest in it because of the product line, their unparalleled R&D, their cash flow and their historic yield! Not one mention of any of those things.

    Cisco has languished for years and pays no dividend. That's the best you can do in the tech sector??? I mean if you're going to recommend a tech, start with Intel at least.

  • Report this Comment On January 12, 2010, at 9:10 AM, SkepticMan50 wrote:

    Is this a bona fide article or an advertisement? Answer: the latter...

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