#neversell

Common sense or speculation?

An investing trend that has been gaining popularity is the idea of #neversell. The theory behind #neversell seems to be that:

  1. Stocks go up in the long run

  2. Most large fortunes have been made by heavily concentrated investments in a single company that compounds dramatically over a long period of time

Benjamin Graham, the father of “value investing”, made more money from a single “growth” investment in GEICO (which he held for decades) than from all of his other “value” investments combined.

Warren Buffett says his “favorite holding period is forever.”

Charlie Munger’s first rule of compounding is to “never interrupt it unnecessarily.”

Philip Fisher, who greatly influenced Buffett, says “if the job has been correctly done when a common stock is purchased, the time to sell it is – almost never.”

While these pithy proclamations sound sensible, and it is difficult to argue with the successes of some of history’s greatest investors, is #neversell really a viable strategy for the average investor?

Or is this just another example of survivorship bias?

Only 60 of the Fortune 500 companies from 1955 remained in 2017. If you had the foresight to pick one of the 12% of winners, then perhaps you would have done OK from never selling. But if you had concentrated your wealth in one of the 88% of losers (for simplicity, I’m ignoring the fact that some of these companies may have merged with other entities and survived in some form), you would have faced probable ruin.

Netflix has returned 14,500%+ over the past 15 years, but in order to realize those returns the investor would have had to endure multiple 50-80%+ drops for extended periods of time. If you had never sold during those 15 years, you would have done wonderfully. But it’s not hard to envision an alternate world where a -80% drop became -100%, permanently, due to a twist of fate. How many other companies, which IPO’d at the same time as NFLX and had similarly bullish prospects ended up bankrupt, or simply had mediocre returns? How likely is it that the average investor today will be able to identify the Googles, Facebooks, Apples and Netflixes of the next 15 years? If you only have a 12% chance of picking a company that is going to be around in 60 years, what are the odds that you are going to pick one of the top 1% that will not only survive but also prosper?

I’m skeptical that even a skilled investor can identify these opportunities. Sure, there will be some lucky winners who pick the right company and have the fortitude to hold on indefinitely, but odds are they will be vastly overwhelmed by the stubborn losers who hang on to a company as it drops to zero. If an investor has the discipline to treat these bets for what they are (mostly speculation), and diversifies his or her portfolio accordingly (similar to a venture capital or angel investment approach), then maybe the handful of winners will outweigh the multitude of losers. But the idea of #neversell is often tied to over-concentration and overconfidence - most people think that they are better than average, and that they alone will be able to identify the most promising opportunities.

Another reason for my skepticism is that #neversell is fundamentally price-insensitive. If you believe that a company is worth $100 / share even in the best case scenario, and it is trading at $200 / share, then what possible justification can there be for holding? Any potential gains are based on pure hope and speculation. When a #neversell mentality is combined with an asset that is fundamentally impossible to value (i.e. Bitcoin), the results can be spectacular. Taken to its logical end, the idea of #neversell can be used to justify buying any asset at any price.

This doesn’t seem like a strategy that is distinguishable from luck, and I would have little confidence in my ability to replicate its success on a long-term basis.