My bias is to try and hold wonderful businesses forever. In that spirit, I’ve created this wonderful business holding checklist to help slow me down when I think about selling a wonderful business. The first two items were cloned from Mohnish Pabrai.
When considering selling a wonderful business, stop, and run through this checklist:
1. Is the business still getting better?
Meaning, is the moat widening? If the business is not getting better and the moat is getting smaller, then it is okay to sell.
2. Is the price egregiously overvalued?
Wonderful businesses often appear to be overvalued, but we are not talking about optically overvalued. Often they continue to grow and the valuation ends up making sense. Here we are talking about egregiously overvalued. Sell if the price is egregiously overvalued.
If the business is still getting better and it is not egregiously overvalued, I do have two scenarios where I would still sell a wonderful business.
3. Are you selling to buy another wonderful business that you like better?
If I find another wonderful business that I like better, I will sell a wonderful business to buy it.
4. Did I find a perfect investment?
Did I find a perfect investment, like Ted Weschler’s investment in Dillard’s? If I find a perfect investment that has a lot of upside and an understood and small or nonexistent downside, then I will be willing to sell a wonderful business to buy it.