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 tight -- 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 has already collapsed. You really need 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, you're 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.
Today, the managers that I'd seriously consider teaming up with include Reed Hastings at Netflix (Nasdaq: NFLX ) and Alan Kirshner and Tom Gayner at Markel (NYSE: MKL ) . Both companies are blessed to have insiders who act as true stewards of company capital. In situations like these, you can be confident that someone is on the job, protecting your investment at all times.
Case No. 2: Altria
Return, 1970-present (including dividends): 108,000%
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. While tobacco may have seen its best days (especially in this country), there's no shortage of these types of companies excelling today.
For example, the addiction du jour seems to be fatty foods, so consider siding with giants like McDonald's (NYSE: MCD ) and Burger King (NYSE: BKC ) to hook yourself onto the products that consumers are constantly craving and consuming. In principle, we 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): 8,400%
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. These days, Apple is currently reaching some sort of zenith, but other, somewhat smaller companies exhibit similar characteristics, too.
For example, I notice how PepsiCo (NYSE: PEP ) has completely evolved its business model by purchasing its major bottling partner, thereby forcing Coca-Cola (NYSE: KO ) to make a knee-jerk reaction and do likewise. This decision has changed the entire dynamic of the industry (for the better, in theory). Pepsi has a fairly long history of making smart, profitable decisions ahead of the game like this. Let's invest with companies that can zig and zag when others have cement feet.
Case No. 4: Qualcomm (Nasdaq: QCOM )
Return, 1991-present: 7,400%
We want businesses that can take on new customers without needing to seriously build out their existing operations. Once Qualcomm had built its manufacturing platform, the company had the ability to scale up its customer base at an incredible clip, especially as the cell phone age dawned.
For a company processing computer chips, the costs of adding 5,000 or 5 million new customers are relatively insignificant. 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 that the candidate you've found is 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 60 percentage points on average. The market is in serious turmoil these days, but you can lay the foundation of future financial success 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 Pepsi and Markel. Berkshire Hathaway, Markel, and Coca-Cola are Motley Fool Inside Value picks. Apple, Berkshire Hathaway, and Netflix are Stock Advisor picks. Coke and Pepsi are Income Investor choices. The Fool owns shares of Berkshire Hathaway, Coke, Pepsi, and Markel and has a full disclosure policy.