Common Stocks and Uncommon Profits – Part 2

In this part, we will look at a few aspects of investing “When to buy?”, “When to sell?” and a few don’ts for investors. In the previous part, we looked at “What to buy?” under the scuttlebutt and 15 questions approach.

When to buy?

Fisher says the time to buy is always. Timing the market is futile as many great investors say and this is true.  Time in the market and not timing the market is what brings you the profits. Fisher aptly says, “Be undeterred by fears or hopes based on conjectures, or conclusions based on surmises”.

When to sell?

Fisher says, “There are only three reasons, and three reasons only for the sale of any common stock..”. The first reason is an obvious one. This is when a mistake has been made in the original purchase and the background of the company is less favourable than originally believed. To cope with this, the investor must have self-control and the ability to be honest with himself. Fortunately, the long-term profits from really good common stocks should more than balance the losses from a minimal percentage of such mistakes.

The second reason is when the company invested in no longer qualifies in regards to the fifteen points as discussed in part 1. This is why an investor should always be on their guard and must be in close contact with the affairs of the companies whose shares are held. Companies deteriorate for two reasons: either management has become slack or company’s prospects of increasing the markets for its products is decreasing.

The third reason to sell is to make funds to buy into a better company with better prospects than the current invested one.

Once a stock has been properly selected and has borne the test of time, it is only occasionally that there is any reason for selling at all. One should not sell due to fear of the economy or imminent war, for example. One should also not sell due to the reason that the stock has gone way up in price. The probability of participating in continued growth is obviously worth something. One cannot pinpoint just how much per share a particular company will earn two years from now.

So to summarise, “If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never”.

Don’ts for investors

  1. Don’t buy into promotional companies (eg. IPOs)
  2. Don’t buy a stock just because you like the “tone” of its annual report.
  3. Don’t assume that the high price at which a stock may be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price. (A current price at 52-week high doesn’t been it cannot go any up further in the long-term)
  4. Don’t quibble over eighths and quarters. (Don’t be particular of buying a stock at $0.205 instead of $0.210, which is at market price, if the company has potential to be a ten-bagger)
  5. Don’t overstress diversification.
  6. Don’t be afraid of buying on a war scare.
  7. Don’t be influenced by what doesn’t matter.
  8. Don’t follow the crowd.
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