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.
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%
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%
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:
- Use it as a further tool to 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.
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.