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Sometimes we buy a company that turns out not to be what we had hoped. In such cases, the stock is sold and the proceeds put into other, more promising situations. If the price we paid originally was not too high, the penalty for being wrong is not horrible.
We do not live in an ideal world, alas. Sometimes the economics of a winning business change and a long-term winner must be sold. Frequently expert management will recognize the situation before we do and take appropriate action. We are very reluctant sellers of great businesses and will go to great lengths to assure ourselves that indeed the business has changed, not that we have merely hit a temporary lull in an otherwise terrific story.
When is the right time to sell a great business? Almost never, because, over time, the rewards can be so enormous. But if we do sell, proceeds are reinvested in more promising situations.
The result is a slow winnowing process. As losers are discarded and winners retained, we develop a portfolio of outstanding companies with the ability to deliver outstanding returns year after year. Proven managements, cash-rich balance sheets, and good business prospects make them at once conservative investments and excellent performers.