Don't Sell This Stock. Ever.

Legendary investor Philip Fisher bought a little radio company called Motorola in 1955 and helped pioneer 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. I fight that same instinct -- it seems so necessary to micromanage every little situation.

But that's precisely what you don't want to do. Today may just be the single best day 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 many times before about when it's time 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 definitely 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 (NYSE: BRK-B  )
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. Without the two of them, Berkshire would probably be a defunct, rusted-over textile mill. With them, it's been an absolute powerhouse of a company.

Berkshire is an old story. But today, there are plenty of managers that I'd seriously consider teaming up with. These names include people like Alan Kirshner and Tom Gayner at Markel (NYSE: MKL  ) and many, many others. The folks at Markel have shown themselves to act as true stewards of company capital, just like Munger and Buffett have at Berkshire. When you have a situation like this, you can be confident that someone is on the job, protecting your investment at all times.

Case No. 2: Altria (NYSE: MO  )
Return, 1970-present (including dividends): 130,000%.
Lesson: Undeniable consumer-facing trends.

Regardless of how you feel about Big Tobacco, you have to admit that Altria is highly successful 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 others 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): 10,400%.
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. These days, Apple is doing precisely that with products like the iPhone and the iPad.

Other companies are capable of this, too. For example, I notice how PepsiCo (NYSE: PEP  ) has completely evolved its business model by purchasing its major bottling partner. 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: Amazon.com (Nasdaq: AMZN  )
Return, 1991-present: 9,800%.
Lesson: Scalability.

We want businesses that can take on new customers without needing to seriously build out their existing operations. Once Amazon had built its online platform and distribution channels, the company had the ability to scale up its customer base at an incredible clip, especially as it coincided with the dawn of the e-commerce age. For a company operating in this space, 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.

So, the point of all this is that 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 Million Dollar Portfolio service. And it's worked for us thus far: Since our service's inception in 2007 right before the market's epic collapse, we've beaten the S&P 500 by more than 5 percentage points on average. Though it's true that the market is still in serious turmoil, you can lay the foundation of future financial success with just a few smart investments today.

MDP is opening its doors for the first time in more than a year to new members. If you'd like to take a risk-free look at the service, just enter your email address in the box below. Take the first steps toward a market-crushing portfolio.

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 Apple, Pepsi, and Markel. Berkshire Hathaway and Markel are Motley Fool Inside Value picks. Apple, Amazon.com, and Berkshire Hathaway are Motley Fool Stock Advisor choices. PepsiCo is a Motley Fool Income Investor pick. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Altria Group, Apple, Berkshire Hathaway, and Markel.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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