Philip Fisher (1907–2004) is widely considered the pioneer and thought process leader in long-term value investing. Years after his death, Fisher
is widely respected and admired as one of the most influential investors of all time. Fisher developed his long-term investing philosophy decades ago
and discussed them in his seminal book, Common Stocks and Uncommon Profits. Common Stocks and Uncommon Profits was first published in 1958
and continues to be a must-read today for investors and finance professionals around the world.
Today, we will dig deeper into his selling discipline. For many investors, buying a stock is much easier than deciding when to sell it. Selling securities is much more difficult than buying them. The average investor often lacks emotional self-control and is unable to be honest with himself. Since most investors hate being wrong, their egos prevent taking losses on positions, even if it is the proper, rational decision. Often the end result is an inability to sell deteriorating stocks until capitulating near price bottoms.
Selling may be more difficult for most, but Fisher actually has a simpler and crisper number of sell rules as compared to his buy rules (3 vs. 15). Here are Fisher’s three rules for selling a stock:
- Wrong Facts: There are times after a security is purchased that the investor realizes the facts do not support the supposed rosy reasons of the original purchase. If the purchase thesis was initially built on a shaky foundation, then the shares should be sold.
- Changing Facts: The facts of the original purchase may have been deemed correct, but facts can change negatively over the passage of time. Management deterioration and/or the exhaustion of growth opportunities are a few reasons why a security should be sold according to Fisher.
- Scarcity of Cash: If there is a shortage of cash available, and if a unique opportunity presents itself, then Fisher advises the sale of other securities to fund the purchase.
Many investors are reactive and sell at the same time everyone else does—when they’re fearful. But your emotions aren’t the best guide for making critical financial decisions. Long-term investors should not fear occasional swings in the market. When the market dips or takes an unusual turn, that is the perfect time to review your portfolio and re-evaluate your investing strategy.