One of the most insightful lessons delivered by legendary investor Phil Fisher, is on the topic of "when to sell?" To that question, his answer is: almost never. As long as you have properly selected an outstanding growth company -- and its future growth potential is abnormally high relative to that of the general market -- don't sell. Timing the market is incredibly difficult, and can get in the way of tax-free compounding, not too mention introduce confounding psychological issues for the investor. Like, for example, selling an outstanding company after a double in the market value, then never buying it back and watching it continue to go up, up and away! Many times these outstanding companies advance in price many multiples in time.
My view is that in the small and microcap investment arena today, investors strategy is to sell a stock after a quick double, or some other sharp advance. There isn't any follow-through. There appears a belief that the share prices are not sustainable, even though there are certain unusual growth companies emerging as we enter 2017 [another plug for RADCOM (NASDAQ: RDCM), Gigamon (NASDAQ: GIMO) and Radisys (NASDAQ: RSYS), and a couple others I'm not sharing at this time]. Quite a pessimistic view, in my opinion. Pessimism, of course, has pervaded the collective world psyche for much of the past few years as populism and anger spreads around the globe.
The thing that will put a stop to investors dumping stocks on a rather trivial price appreciation strategy, is the realization that some of these outstanding companies have many, many years of unusual growth and increasing earning power ahead of them. At that point, I think we will see some truly incredible moves in the stocks of these companies. And maybe, just maybe, this pernicious cycle of negativity and pessimism will begin to abate.
On market timing when holding a great growth stock
Should an investor sell a good stock in the face of a 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 a bulk of equity investments in this country appear to reflect the belief that when an investor has achieved a good profit in a stock and fears the stock might well go down, he should grab his profit and get out. My view is rather different. Even if the stock of a particular company seems at or near a temporary peak and that a sizable decline may strike in the near future, I will not sell the firm's shares provided I believe the 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 too many of them. However, for someone who understands and applies sound fundamentals, I believe that a truly outstanding company can be differentiated from a run-of-the-mill company with perhaps 90 percent precision.
Disclosure: I own RDCM shares, and may buy/sell RDCM, RSYS or GIMO shares at any time.