You did all of your due diligence on a company. You looked at cash and debt. You liked its profit growth or revenue growth. You figured out a reasonable price for the stock. But immediately after you buy the stock for a fair price it declines. Why?
Benjamin Graham would say: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Which basically means that you should give a stock time before you judge it on market performance, perhaps 5 years or more.
Should you always hold a stock for at least 5 years? The answer is a qualified yes. If nothing has changed in the fundamentals of a company, the stock should continue to be held. However, if there is something significant that changes, you definitely should consider whether it is time to make a sale.
In the last two weeks we have seen a decline in the tech sector and some amount of stagnation. Stagnation means that a sector, or the market as a whole, does not move much. This can go on for a short period of time or longer periods such as a year or two. Sectors tend to fall out of favor. Then they come back in to favor if enough investors decide the sector is a good investment. There are also investors who move from sector to sector during different parts of the year, hoping to pick up on quick moves in certain shares.
In addition, especially among smaller companies, insiders sell from time to time and if in big enough quantities it will move the share price lower. That is something you just have to put up with.
Market values really have very little to do with the worth of the company or the company’s stock. Buy and hold the best stocks and you will do well in the longer term.
- Warren Buffett’s Advice: Why You Should Buy and Hold – Rule One Investing
- Warren Buffett’s Stock Sales: Our Favorite Holding Period is Forever? – Insider Monkey
- Benefits of Long-term Investing – Stock Basket
- These 10 Rules Made Warren Buffett a Billionaire – Global Future Capital
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