If your research indicates that the shares are available below their intrinsic value, you have a "margin of safety". You can make the investment. Now you have to manage it successfully.
Buffett has no use for investment management in the usual sense: the active buying and selling of shares across a large number of holdings on a day-to-day basis. Rather, he points out the advantages of investing so wisely that you never have to sell a share.
The Advantages of Not Selling:
* No dealing costs.
* No taxation on your capital gains.
* The magic of compound interest.
The third advantage is the most important in the argument for keeping shares long-term. In The Warren Buffett Portfolio, Robert G. Hagstrom illustrates these advantages by setting out two outcomes from a brilliant $1,000 investment that doubles in value every year:
* Regularly selling a winning investment
If you sell the shares at the end of the year, pay the tax, reinvest the net proceeds, then repeat the process every year for 20 years, you will have a clear profit of $25,200,000.
* Not selling a winning investment
If you do not sell the shares until 20 years have passed, by the time you do eventually sell, you will end up with a stupendous after-tax profit of $692,000,000.
This, of course, is a fairy-tale exercise. But the principle is absolutely real. Never forget it. Remember "Mr. Market"', who is always ready to buy or sell. You are only interested in him when he wants to sell to you at well below market value or to buy well above it. In the first case, you buy. In the second, you seriously consider taking your profit.
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