Common Stocks and Uncommon Profits

by Philip Fisher

             STAY OR SELL IN ANTICIPATION OF POSSIBLE MARKET DOWNTURNS?

     Should an investor sell a good stock in the face of potentially bad market?  On this subject, I fear I hold a minority view given the investment psychology prevalent today.   Now more than ever, the actions of those who control the vast bulk of equity investments in this country appear to reflect the belief that when an investor has achieved a good profit in the stock and fears the stock might well go down, he should grab his profit and get out.  My view is rather different.  Even if a stock of a particular company seems at or near a temporary peak and that a sizeable decline may strike in the future, I will not sell the firm's shares provided I believe that its longer term future is sufficiently attractive.  When I estimate that the price of these shares will rise to a peak quite considerably higher than the current levels in a few years time, I prefer to hold.

     My belief stems from some rather fundamental considerations about the nature of the investment process.  Companies with truly unusual prospects for appreciation are quite hard to find for there are not to many of them.  However, for someone who understands and applies sound fundamentals,  I believe that a truly outstanding can be differentiated from a run-of-the mill company with perhaps 90 percent precision.

     It is vastly more difficult to forecast what a particular stock is going to do in the next six months. Estimates of short term performance start with economic estimates of the coming level of general business.  Yet the forecasting record of seers predicting changes in the business cycle has generally been abysmal.  They can seriously misjudge if and when recessions may occur, and are worse in predicting their severity and duration.  Furthermore, neither the stock market as a whole nor the course of any particular stock tends to move in close parallel with the business climate.  Changes in mass psychology and in how the financial community as a whole decided to appraise the outlook either for business in general or for a particular stock can have an overriding importance and can vary almost unpredictably. For those reasons,  I believe that it is hard to be correct in forecasting the short-term movement of stocks more than 60 percent of the time no matter how diligently the skill is cultivated. This may well be too optimistic an estimate.  On the face of it, it doesn't make good sense to step out of a position where you have a 90 percent probability of being right because of an influence about which you might at best have a 60 percent chance of being right.

     Moreover , for those seeking major gains through long-term investments, the odds of winning are not the only consideration.  If the investment is in a well-run company with sufficient financial strength, even the greatest bear market will not erase the value of the holding.  In contrast, time after time, truly unusual stocks have subsequent peaks many hundreds of percent above their previous peaks.  Thus, risk/reward considerations favor long term investment.

     So putting it in the simplest mathematical terms, both the odds and the risk/rewards considerations favor holding."