Friday, 12 October 2012

You are not compelled to sell just because of short-term appreciation. Fisher taught either the investment you hold is a better investment than cash or it is not.

Sometimes the market will quickly confirm Buffett's judgement that a company is a good investment.  When that happens, he is not compelled to sell just because of short-term appreciation.  

He considers the Wall Street maxim "you never go broke taking a profit" to be foolish advice.

Fisher taught him that either the investment you hold is a better investment than cash or it is not.  

Buffett says that he is "quite content to hold any security indefinitely, so long as 

  • the prospective return on equity capital (ROE) of the underlying business is satisfactory, 
  • management is competent and honest, and 
  • the market does not overvalue the business. 


If the stock market does significantly overvalue a business, he will sell.

In addition, Buffett will sell a fairly valued or undervalued security if he needs the proceeds to purchase something else - either

  • a business that is even more undervalued or 
  • one of equal value that he understands better.  


Beyond this investment strategy, however, Buffett confessed in 1987 that there are three common-stock positions that he will not sell, regardless of how seriously the stock market may overvalue their shares:  The Washing Post Company, GEICO Corporation, and Capital Cities/ABC.  In 1990, he added The Coca-Cola Company to this list of permanent common-stock holdings.

This 'till-death-do-us-part attitude places these four investments on the same commitment level as Berkshire's controlled businesses.  Permanent status is not something Buffett hands out indiscriminately.  And it should be noted that a company is not automatically "permanent" on the day Buffett buys it.  Berkshire Hathaway has owned shares of The Washington Post Company for 20 years and GEICO for 18 years.  Buffett first purchased Capital Cities in 1977.  Even Coca-Cola, first purchased in 1988, was not elevated to permanent status until 1990.

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