A falling share price can test your patience when a business is doing well. It can also reveal that you bought the wrong company. Philip Fisher's answer starts before either happens: make the possible loss bearable, understand why the business deserves your money and keep testing that understanding. Holding for years makes sense while the company continues to earn the commitment.
You cannot eliminate mistakes. You can limit their consequences and decide what evidence would make you act. That leaves room for patience without turning an investment into a loyalty test.
Make room for being wrong
First remove money needed for emergencies and specified future expenses. Fisher puts most significant family capital in established, financially strong growers. A young business may offer greater gains and a possible total loss. Any speculative portion must fit the household's resources and obligations. Growth does not abolish recessions, either. Sufficient financing helps a company survive hard times while weaker competitors struggle.
Several well-researched holdings reduce dependence on one company's luck. Counting names is insufficient. Businesses can share an industry risk, while one company may serve varied customers with different products. Management depth matters too: dependence on one executive adds vulnerability. More cyclical businesses need more diversification around them.
Fisher's initial commitments shrink as business risk rises. His allocation examples concern money put in at purchase, rather than automatic limits on later portfolio weights. He would add more holdings when they offered comparable growth for the risk and could be followed equally well. Adding poorly understood companies merely to increase the count can dilute quality and exceed the owner's attention.
A growing holding also needs a fresh risk judgment. Fisher originally classified Ampex as a small, highly risky company. During nineteen fifty-six and fifty-seven it tripled in size, profits grew faster still and its recorders reached more growth industries. Its market position, management depth and competitive strength improved. He moved it into a less risky category. A larger portfolio weight could reflect a stronger business. Price appreciation alone could not justify that conclusion.
Three reasons to sell
Fisher distinguishes personal cash needs from sales intended to improve investment results. For a company selected through his quality standards, the first investment reason is a mistaken purchase. If the business proves materially worse than you thought, waiting to recover the price you paid can compound the error. A sounder investment might use the money better. Breaking even has no special business significance.
The second reason is deterioration in a formerly sound investment. Managers may become complacent or successors abandon good policies. Fisher calls for prompt action despite taxes or a favorable market. A company can also exhaust its worthwhile growth opportunities under competent managers. That allows a more deliberate sale while looking for a better use of the capital.
To judge continued growth, compare earnings per share across business cycles. Estimate the increase from present earnings to the next cycle's peak. Compare it with the increase from the preceding peak to present earnings. An equally strong further increase supports holding. Adjust for stock splits and stock dividends, which change the share count without bringing in money. Count the extra shares issued to raise fresh funds. The forecast remains uncertain; one disappointing quarter cannot settle it.
Third, a clearly better long-term opportunity can justify switching after tax. The hurdle is demanding because you know the existing company's weaknesses as well as its strengths. A newcomer may contain a problem you have missed. Its expected advantage must justify surrendering that knowledge and paying the tax.
Patience still takes judgment
A large past gain does not use up future earning power. If the company's exceptional qualities persist, years of ownership may remain justified. Understanding why it should prosper gives you something specific to monitor, even when you cannot predict the date its share price will respond. Delays call for discipline while the business case remains sound.
Selling to avoid a predicted bear market creates another decision: when to buy back. The decline may never arrive. If it does, fear or a missed target can keep you out until the shares rise above your selling price. Taxes on a large gain also leave less money for repurchase. Avoiding a temporary fall is only part of the calculation.
Study errors without letting the result rewrite the reasoning. A loss does not establish incompetence, and a profit does not prove a decision was sound. Identify what was misjudged; repeated disappointing results warrant reviewing your ability or your adviser's.
Fisher's son Kenneth brings that scrutiny home in his retrospective introduction. As his father's energy declined, he reduced his holdings. Kenneth saw diminishing capacity behind what his father described as improving quality. He recalls poorly timed sales and unsuccessful late purchases, and believes leaving earlier holdings alone or withdrawing from active decisions would have served him better.
That account supplies no universal age cutoff. Kenneth also thought his father's repeated scrutiny may have restrained mistakes while limiting the risks he accepted. Habitual worry offers no model to copy. Long ownership still requires someone capable of distinguishing a slow result from a failed investment, and willing to reconsider who should make that judgment.
Three things to keep
A mistake must remain affordable, even when a company's prospects look exceptional.
Sell for a changed business judgment, not simply a past gain or loss.
Patient ownership requires continued judgment about both the company and your own capacity.