Common Stocks and Uncommon Profits Ch. 6: Selling — and Fisher's Three Reasons

"If the job of buying has been done correctly, the time to sell almost never comes." — Philip Fisher

Investment Context

Fisher's stance on selling is unusually restrictive: only three situations justify a sale, and nothing else does.

His record matches the doctrine — he bought Motorola in 1955 and held it until shortly before his death in 2004, nearly fifty years.

The Wall Street Translation

1. The Three Reasons

• One: the original analysis was wrong. The advantage you identified does not exist, or never existed as you understood it. This is the most important and hardest to admit.
• Two: the company no longer meets the standards. The business itself deteriorated — weaker management after a succession, declining research productivity, an eroding moat.
• Three: a clearly superior opportunity appeared. And it must be clearly superior, enough to cover transaction costs and taxes.

Fisher constrained the third tightly: the new idea must be significantly better, not marginally so, because you understand your existing holding far better and are more likely to misjudge the newcomer.

2. Reasons He Explicitly Rejected

| Common reason to sell | Fisher's judgment | |---|---| | The P/E has become high | Not a reason — continued earnings growth absorbs a high multiple | | A recession may be coming | Not a reason — macro forecasts are unreliable and selling triggers tax | | It has risen a lot; take profits | Not a reason — "you never go broke taking a profit" also never makes you rich | | I need the money | Legitimate, but that is cash-flow management, not an investment judgment |

3. Why "Taking Profits" Was the Phrase He Most Opposed

His argument is direct: if you own a business capable of compounding for decades, every act of taking profits forfeits all the compounding that follows.

A numerical illustration: a stock compounding at 15% roughly quadruples in ten years and grows about sixteenfold in twenty. Selling at year ten does not forfeit half the return — it forfeits three quarters of it.

4. The Precondition for This Discipline

Fisher's method rests on a precondition worth stating plainly: it holds only if you genuinely selected an excellent business. Applying the same patience to a mediocre one produces decades of opportunity cost.

This is why Fisher placed nearly all the work before purchase — scuttlebutt, the fifteen points, management assessment. All of it exists to make the buy decision correct enough that "almost never sell" becomes a viable strategy.

5. How Sell Discipline Interacts With Taxes

Fisher's case for long holding rests on an economic foundation often left implicit: taxes.

In a taxable account every sale realizes capital gains and triggers tax on money that would otherwise keep compounding. Holding for twenty years versus turning over every five can differ by thirty percent or more after tax, even with identical gross returns.

This consideration does not apply in tax-deferred accounts: inside an IRA or 401(k) trades create no current tax, so turnover costs only commissions and spread.

The implication: sell discipline should differ by account type — the bias toward holding should be stronger in taxable accounts.

Actionable Trading Rules

1. Check your reason against the three: If it is not among them, it is probably emotion or macro noise.
2. Separate "expensive" from "deteriorating": A rising multiple is not a sell signal; declining business quality is.
3. Do the work before buying: Strict purchase criteria are what make a long-hold strategy viable in the first place.