Excerpt from "Common Stocks and Uncommon Profits"
There is still one other argument investors sometimes use to separate themselves from the profits they would otherwise make. This one is the most ridiculous of all. It is that the stock they own has had a huge advance. Therefore, just because it has gone up, it has probably used up most of its potential. Consequently they should sell it and buy something that hasn’t gone up yet. Outstanding companies, the only type which I believe the investor should buy, just don’t function this way. How they do function might be best understood by considering the following somewhat fanciful analogy.
Suppose it is the day you were graduated from college. If you did not go to college, consider it to be the day of your high school graduation; from the standpoint of our example it will make no difference whatsoever. Now suppose that on this day each of your male classmates had an urgent need of immediate cash. Each offered you the same deal. If you would give them a sum of money equivalent to ten times whatever they might earn during the first twelve months after they had gone to work, that classmate would for the balance of his life turn over to you one quarter of each year’s earnings! Finally, let us suppose that while you thought this was an excellent proposition, you only had spare cash on hand sufficient to make such a deal with three of your classmates.
At this point, your reasoning would closely resemble that of the investor using sound investment principles in selecting common stocks. You would immediately start analyzing your classmates, not from the standpoint of how pleasant they might be or even how talented they might be in other ways, but solely to determine how much money they igt make. If you were part of a large class, you would probably eliminate quite a number solely on the ground of not knowing them sufficiently well to be able to pass worthwhile judgement on just how financially proficient they actually would get to be. Here again, the analogy with intelligent common stock buying runs very close.
Eventually you would pick the three classmates you felt would have the greatest future earning power. You would make your deal with them. Ten years have passed. One of your three have done sensationally. Going to work for a large corporation, he has won promotion after promotion. Already insiders in the company are saying that the president has his eye on him and that in another ten years he will probably take the top job. He will be in line for the large compensation, stock options, and pension benefits that go with that job.
Under these circumstances, what would even the writers of stock market reports who urge taking profits on superb stocks that ‘have gotten ahead of the market’ think of your selling out of your contract with this former class-mate, just because someone has offered you 600 per cent on your original investment? You would think that anyone would need to have his head examined if he were to advise you to sell this contract and replace it with one with another former classmate whose annual earnings still were about the same as when he left school ten years before. The argument that your successful class-mate had had his advance while the advance of your (financially) unsuccessful classmate still lay ahead of him would probably sound rather silly. If you know your common stocks equally well, many of the arguments commonly heard for selling the good one sound equally silly.”
Ciao till next time...Harsha
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