What If You Couldn't Sell?

Many investors are familiar with Warren Buffett's having said that he wouldn't mind if the markets closed for a year or two and he couldn't get a quote on his shares.

While it sounds cute and quaint, it's a notion worth considering. Two of the large advantages that we as small investors have are time and liquidity. Time is in our favor because we can allow a position in a stalwart like 3M (NYSE: MMM) to develop, even if there are a couple of bad quarters, without worrying about reporting a bad quarter ourselves. And that can help us get gains. For evidence, just take a look at how 3M's one-year chart compares with its 35-year chart. Lower liquidity requirements work to our advantage because we don't need large trading volumes to build up a position in a small company like $2 billion Nissin (NYSE: NIS) -- which trades just 14,000 shares per day on average -- without moving the market.

The question is: Why should one give those advantages up in pursuit of riskier or more short-term gains?

What if you actually had to hold for years?
Madness, you say? The stock market is open every day!

Yes, that's basically true. There have been brief closures caused by war or acts of terrorism, but the market is almost always open on business days. Instead, think of the question in terms of being so busy with work and family life that there simply isn't time to manage and follow investments on a weekly or even monthly basis. Stocks fall substantially in a matter of days all the time. Sometimes it happens to very good companies. Just ask holders of Serono (NYSE: SRA), which dropped 10% on April 10 after management announced that it had not found a buyer for its stake in the firm.

You'll need to be certain about two things
To be willing to hold a company, you need to know about the durability of the business. This is just as critical to think about for a large stable company like big-box retailer Target (NYSE: TGT) as it is to a smaller, faster-growing company like Internet manager Websense (Nasdaq: WBSN). Both will face competitive threats over time, but given its industry's unpredictability, smaller size, and shorter track record (Websense was founded in 1994, Target in 1902), I consider Websense a far more risky proposition to hold if I had to buy and hold and hold.

The other buy-and-hold necessity is the right valuation. This means determining how much the business can generate over a period of years and discounting those cash flows back to the present -- just as you would for a bond or a savings account.

Foolish final thoughts
Assessing a company's competitive advantage and making sure a fair price is paid are two keys to market-beating investing. Then you need to have the patience and fortitude to build a position and be willing to hold for the long term.

That's precisely the strategy that analyst Philip Durell is using to beat the market at Motley Fool Inside Value. He recommends great business at great prices -- like 3M -- and waits for the market to reward him. To join the hunt of long-term outperformance, click here to be Philip's personal guest at Inside Value. There's no obligation to subscribe, and you'll get two stock picks per month, access to all the selections to date, and a Foolish community of like-minded investors in pursuit of great stocks at great prices.

Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool's disclosure policy is fluent in the language of love.