Philip A Fisher was an American stock investor best known as the author of “Common Stocks and Uncommon Profits”, a comprehensive – read: wordy – guide to investing that has remained in print since it was first published in 1958.

Fisher was an investor who bought and accumulated growth stocks for the long term. Essentially he would buy stocks to hold, as opposed to selling them quickly for profit.

One of the simpler chapters in his book is on selling a stock, where he points out his investment objectives and examines common reasons one should sell.

Here are five observations based on Fisher’s philosophies when it comes to investing.

1. Mistakes will happen

Let’s say you buy shares in ABC Bhd out of greed and speculation, only to realise you have made a mistake as it is a fundamentally poor stock. What should you do – sell them off and accept your losses, or hold them in the hope prices will climb up?

Based on Fisher’s writings, it is wiser to sell off ABC Bhd than to hold, as the capital you would recoup could be better invested into stocks that will deliver consistent growth in revenue, profit and cash flow over the long term.

2. Businesses can deteriorate

Assume ABC Bhd is a fundamentally solid company with a portfolio of traditional media businesses. It has market dominance and has generated continual growth in earnings over the years.

But after you invest in ABC Bhd, things change. Traditional media declines as online content booms. ABC Bhd has not kept up and begins to see a fall in sales, profit and cash flow.

In this case, the disposal of its shares is warranted. Similar to selling off stocks that are deemed mistakes, the capital recovered would be better off reinvested into those with better fundamentals so you can build your wealth over the long term.

3. The future is unpredictable

You have invested in ABC Bhd, a fundamentally solid stock that has delivered dividends and capital gains. But today you discover XYZ Bhd, a company that could grow faster than ABC in the future. Should you swap ABC for XYZ?

Based on Fisher’s philosophies, this is warranted – though he cautions against this as one could easily misjudge XYZ and risk swapping what works today for what might not work in the future.

In short, always evaluate future investments thoroughly and don’t be hasty just because a stock appears bullish.

4. Bull it and bear it

Some say it is wise to sell off fundamentally decent stocks before the market crashes. But Fisher argues: who knows exactly when a crash would happen in the stock market? One can merely guess, at best.

Now, let’s say you sell off a good stock out of fear of a market crash. Then, indeed, the market crashes, causing the price of this stock to decline from your selling price. Would you be inclined to buy your stock back at a lower price?

By Fisher’s observations, not many people would do this as they would fear the stock could actually drop lower. The problem is, nobody knows where the bottom lies.

Thus, to him, it is more practical to focus on a stock’s fundamentals, make sure it can weather both bull and bear markets, and hold on to them for the long term.

5. The price isn’t always right

Fisher’s focus was always on a stock’s growth prospects over price. It did not make sense for him to sell stocks that had ample growth prospects simply because their current price-to-earnings (P/E) ratio was high.

Assume that ABC Bhd has 500 retail stores with as much as RM100 million in earnings, or RM1 in earnings per share. Its current stock price is RM30 a share, meaning it has a P/E ratio of 30, and you are considering selling.

Now, what if ABC Bhd reveals it intends to expand to 1,000 stores in the next three to five years? Coupled with sales growth from existing stores, its yearly earnings could rise to RM200 million within the next half a decade.

Would this impact your decision to sell off ABC Bhd today? You bet.

Hence, it is more practical to assess business growth before selling off a stock.

This article first appeared in KCLau.com. Ian Tai is a financial content writer, dividend investor, and author of many articles on finance featured on KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’ and ‘Small Cap Asia’ in Singapore.