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A Few Winners Carry The Portfolio
The rule
A handful of steady growers drive nearly all of a basket's return. So uprooting a winner early to book a small gain is the costly mistake.
Where it flips
"Let winners run" can slide into never trimming, even when one holding grows dangerously large or the business has clearly broken. The fix is to hold winners for the business, not the price, and to sell only when the quality or the story truly fails, not merely because it went up.
Over a long life of investing, most of your total gain will come from just a few businesses that grow enormously. The rest do little or nothing. The great danger is that these giant winners look expensive along the way, tempting you to sell after a 50% gain. So you cut the very plant that would have grown a hundredfold. You cannot know in advance which few will carry everything, so you must let your winners run. Booking a quick profit on a great business is often the most expensive thing you can do.
A worked example
Rohan sells a steady grower after it rises 60%, pleased with the profit. Over the next twelve years that same business rises tenfold more. The gain he gave up dwarfs everything else in his basket combined. [illustrative]
How to spot it
- ·resists selling just because a stock rose a lot
- ·expects most return from very few names
- ·sells on broken business, not on a nice gain
Pulak Prasad · What I Learned About Investing from Darwin