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 what you should be considering 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 -- especially after the economy already collapsed. 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, 1964-2009: 434,000%
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, vice-chairman of Berkshire and chairman of Berkshire look-alike Wesco Financial. Without the two of them, Berkshire would probably be a now-defunct textile mill. With them, it's been an absolute powerhouse of a company, investing in greats like Nike (NYSE: NKE  ) and Kraft (NYSE: KFT  ) . Which goes to show: We should absolutely demand fantastic management.

Case No. 2: Altria
Return, 1970-present (including dividends): 101,000%
Lesson: Undeniable consumer-facing trends.

Regardless of how you feel about Big Tobacco, you have to admit that Altria is so successful mostly because it runs a business built on a fundamentally consumer-driven -- and highly addictive -- product. Alcohol producers like Diageo (NYSE: DEO  ) are similar in principle, but plenty of nonvice companies display similar characteristics as well -- think about ExxonMobil (NYSE: XOM  ) ? We definitely want a business that appeals to consumers' most fundamental needs and is prepared to meet them with a compelling product.

Case No. 3: Apple
Return, 1984-present (including dividends): 7,400%
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. Apple has had to adapt to a shifting marketplace numerous times, especially throughout its epic battles with a little company called Microsoft. Apple is definitely agile, and we've seen the value destruction that can occur to companies without nimble models (names like Crocs (Nasdaq: CROX  ) come to mind). Let's invest with companies that can zig and zag when others have cement feet.

Case No. 4: Google (Nasdaq: GOOG  )
Return, 2004-present: 480%
Lesson: Scalability.

We want businesses that can take on new customers without needing to seriously build out their existing operations. Once Google had built its platform and had advanced its logarithm sufficiently, the company had the ability to scale up its customer base at an incredible clip. The costs of adding 5,000 or 5 million new customers are relatively insignificant to this model -- the same is true of other search engines like Yahoo! (Nasdaq: YHOO  ) . 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 more than 54 percentage points on average. The market is in serious turmoil these days, but you can lay the foundation of future financial success today with just a few smart investments. 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 Diageo. Berkshire and Apple are Motley Fool Stock Advisor recommendations. Berkshire and Microsoft are Inside Value selections. Diageo is an Income Investor recommendation. Google is a Rule Breakers choice. Motley Fool Options has recommended buying calls on Microsoft. The Fool owns shares of Berkshire Hathaway and has a full disclosure policy.


Read/Post Comments (3) | Recommend This Article (16)

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 March 16, 2010, at 12:07 PM, alandefeld wrote:

    "Dissing" CROX is all one see's in Motley Fool articles ... and all this negativity makes me feel increasingly confident that future Crocs, Inc. 10-Q's will provide significant reason for the company to re-assert it's once-and-future growth status. Of course, I could be wrong - none of us (as far as I know) can truly foretell the future. Keep sweeping CROX under the rug! :-)

  • Report this Comment On March 16, 2010, at 12:48 PM, alandefeld wrote:

    Additionally, despite your assertion that CROX is not nimble, they've spent the last six quarters clearing inventory, shuttering manufacturing capacity, and reconfiguring their distribution network, all in response to a recession that told them they'd produced too much product. In response to increased overseas demand, CROX has expanded its Asian footprint, with plans this year to open some 50+ new outlets in India alone. To properly handle these changes, the founding CEO stepped down so that an industry veteran could take the helm for one year of fancy piloting; now a company veteran is in the CEO chair to take the company forward. I'd say that CROX has been as nimble as Apple in the executive suite, as well as in the product & marketing front. The future will show us if I'm right or not. :-)

  • Report this Comment On March 17, 2010, at 12:18 PM, alandefeld wrote:

    I've held AAPL for over a decade, and while it definitely rates as "don't sell this stock, ever" I don't consider Apple to be particularly nimble, just able to anticipate trends really well. The iPad's probably been in development for years...

    Interesting article about Piper Jaffray reiterating an "overweight" recommendation for CROX:

    "Piper Jaffray Reiterates an 'Overweight' on Crocs, Inc. (CROX); Tweaks PT & Estimates After Meeting with Management--

    March 17, 2010 7:41 AM EDT

    Piper Jaffray reiterates an 'Overweight' rating on Crocs, Inc. (Nasdaq: CROX), price target increased from $8.50 to $9.00.

    Piper analyst says, "We are reiterating our Overweight rating following two days of travel and investor meetings with senior management. We hosted new CEO John McCarvel as well as CFO Russ Hammer, and IR Jennifer Almquist, and came away with increased confidence in leadership, growth strategies, and global market opportunities. We recommend owning CROX shares for potential earnings outperformance, increased visibility into financial leverage, and stable & improving demand trends. We have reviewed our financial model and are tweaking sales & margin estimates slightly higher."

    To see all the upgrades/downgrades on shares of CROX, visit our Analyst Ratings page.

    Crocs, Inc. is a designer, manufacturer, distributor, worldwide marketer and brand manager of footwear for men, women, and children."

    http://www.streetinsider.com/Analyst+Comments/Piper+Jaffray+...

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