Our standard focus on past price performance is not helpful.
Warren Buffett’s answer is ‘forever’. Paraphrasing a famous analyst (possibly Byron Wien but I’m not sure), the key to success [in investing] is knowing when to sell. I’m inclined to follow Wien because his view is the ‘general’ case whereas Buffett’s is a ‘special’ case – the case when, as he puts it, the companies you invest in are wonderful businesses (and presumably for as long as they remain so). In addition, while ‘forever’ is plausible, I’ve never met anyone in real life who actually thinks like that.
Here’s a nice graph. Figure 1 reproduces the price evolution of Apple stock from its inception in the 1980s, a remarkable trip yielding a total return (including dividends) of about 20% per year. (Note: all prices are adjusted for stock splits.)
The question is: should you ever have sold out of this investment?
If you knew in 1980 what you know today you should have bought a lot of Apple stock. But there is something fascinating and yet very dangerous in the wonderful sense of security and misguided confidence an ex-post picture can give us. There is also a strong tendency to stupid behavior, like when an old acquaintance said to me with a straight face that my job was to find him the next Apple or Google.
Throughout an investment’s life, however long and ultimately successful, there are hard decisions to be made and they are not simple. In Figure 1 I’ve highlighted two random, barely visible mini-hills in the series, labelled A (late 1990 to mid-1991) and B (from April to September of 2000). Focusing on an expanded view of A (B is very similar in pattern), you can see in Figure 2 that after a 190% rise in 5 ½ months Apple is taken down to earth with a 43% decline in 3 months.
What should or could you have done at the beginning of April 1991? After almost forty years in the business I still have my doubts, but I do know that you need a process for your investment decisions. In order to deal with the matter properly at least 4 elements are important (in addition to the known and reliable method of the coin toss):
– Knowledge – Deep understanding of a company’s business and success factors;
– Trust – Strong conviction in its management’s ability to guide it through its various phases;
– Stamina – Lots of patience, determination and self-confidence (but not obtuseness);
– Luck – Never underestimate how much.
Price charts don’t enter the equation.
Incidentally, you may ask if there is an easier way to reproduce Figure 1 so that the misleadingly small bumps become more visible and prominent. There is: by using a logarithmic scale as in Figure 3 (A and B are also highlighted), where equal lengths of graph segments correspond to the same percent change – up or down – in price.
After a much smoother price pattern starting from the time of the introduction of the iPhone, is it time to sell?
Roberto Plaja, March 27, 2021
Graphs/data: Bloomberg; author’s calculations
Cover: Danny Robson, ‘Patience’, https://www.saatchiart.com/art/Painting-Patience/877458/3005741/view