Consider this. If you want to multiply your money 100x in 25 years, you want your investment to return 20% every year.
In other words, Rs 1 growing at 20% per annum will turn to Rs 100 after 25 years, excluding all dividends.
But if you sell this stock after 20 years (instead of holding for 5 more years), you will get just Rs 40. The remaining Rs 60 would come only between the 21st and 25th years.
Even if you earn 15% return per annum, your Rs 1 would turn to around Rs 35 in 25 years. But 50% of these returns would come only between the 21st and 25th years.
That’s how compounding works. The longer you let your money grow, the faster will be the incremental return you would earn.
That’s why selling the great businesses you own is often a wrong thing to do.
This is especially true when you sell such a business because of any such reason –
- This stock has risen “too high”.
- This stock is “fairly valued”.
- This stock is not moving. Others are. (Read what I did with Swaraj Engines )
- Competition is rising.
- New government is bad.
- Economy is going downhill.
- Everything is priced in the stock.
- Let me switch to “something better”
Of course, the possibility that one or all of these reasons may warrant a sale or switch to a better stock should be weighed carefully.
But making a decision with an eye on the stock price or the future potentialities external to the business is (often) a bad idea.
Also, when you own a terrific company, you don’t want to sell simply because it is “fairly valued” today. That’s because the company will continue to grow, and its earnings would be materially higher 10, 15, 20 years down the line.
Josh Billings, an American humorist of the nineteenth century, said…
It ain’t ignorance causes so much trouble; it’s folks knowing so much that ain’t so.
Unfortunately, too many investors have this idea that stock prices react to gravity – if they have been rising, it must mean they are due to fall soon.
But always remember this – As long as the business remains great and you believe in its underlying fundamentals, there is no reason to sell any more than is necessary to rebalance your portfolio.
Finally, remember what Philip Fisher said…
If the job has been done correctly when a common stock is purchased, the time to sell is – almost never.