but isn't that like too late unless one spots it before the market (and hence implying some sort of edge)? My hypothesis for 'hold forever' rationale is because one cannot reliably estimate, or frequently underestimates, the fair value of outstanding / quality company which compound over a long time - so would you be ok to say, base case company A compounds at 10% for 10-15 years, I'll only sell if market is pricing a seemingly implausible outcome, say, 20% for 20 years (no hard and fast rule, but you get the drift). The result would still end up being that you probably 'hold forever' since market is unlikely to give us that kind of pricing, but you never know. Limitation is this becomes incrementally harder to judge for companies with new products/services and expanding TAMs.
On hold forever, I cant say it better than this ...
“Psychologically, I don’t mind holding a company I like and admire and I trust and know that it will be stronger than now after many years. And if the valuation gets a little silly, I just ignore it. So, I own assets that I would never buy at their current prices but I am quite comfortable holding them.
Well, I am almost constitutionally. . . I have a defect. And I just won’t pay 30 times earnings… I have never done that but I have one or two now which are now worth 8 or 10 times what I paid for them and they are still marvellous businesses and are still growing and I just hold them. Many investors I know are like me. I cannot defend it in terms of logic. I don’t defend this logic. I just say this is the way I do it and it keeps me more comfortable to do it this way. And I am entitled to this, it’s my own money and I am entitled to do it my own way. A lot of people are just like me. Li Lu is just like me. He will hold things that he bought a long time ago at tiny prices in what are still great companies but he won’t buy more.” — Charlie Munger
Problems I refer to are fundamental but not necessarily short-term detrimental. Loss of focus. Big M&A. Balance sheet deterioration. Shifting of business mix towards lower quality segments. Capital misallocation above a point. Market's indifferent to such things so long as they don't impact next quarter EPS. It's not that I worry about such problems before market. It's that market doesn't event think they're problems for the most part.
Great stuff...quick question: Does Assertion 2 then imply that one should equal weight the businesses in the portfolio ? How to think about portfolio weights if there isn't a reliable way to rank companies by conviction or prospective risk-reward
Portfolio weights, concentration are linked to context, constraints, personal preference etc. My view: if highly selective, then back conviction with buying as much as possible. Since we build portfolio one company at a time (more like PE than typical public market investor), true concentration is known only later. We have loose upper bounds on concentration, but invariably hit 10% FPI shareholding limit well before that. Also, own forever implies that portfolio gets more concentrated over time as winners compound. So, no question of equal weight. In my context, portfolio weights are an outcome, not an input.
Very insightful. I would like to check on how does one decide on time to give for a holding, before deciding to look at alternatives?. The reason I ask is that, I have seen stock prices of some of my holdings stagnate in a zone for several years before a catalyst pushes the price out of the zone. I understand that building conviction and watching the business instead of the stock price movement helps us hold on if we see potential in the business. Now how much time would you give for stocks of such businesses to reflect their potential?, considering business quality is good, growth is in low double digits in a growing industry.
Also there is the opportunity cost of not getting the timing right and missing out on alternatives, how do you handle that?, do you test waters & incrementally build your position in the stock as your thesis plays out? or do you go all in based on your research?
So long as business is tracking on controllable metrics (e.g. market share, balance sheet quality, capital allocation, management actions), we hold tend to hold indefinitely. With hindsight, approach has worked even if a few stock-prices went sideways for many years. On 2nd question, our buying opportunities are so infrequent for our kind of business to get to our kind of price that we buy as much as we can, until (usually) FPI limit stops us.
So when do you actually sell?
When there are irredeemable problems in business quality or governance
but isn't that like too late unless one spots it before the market (and hence implying some sort of edge)? My hypothesis for 'hold forever' rationale is because one cannot reliably estimate, or frequently underestimates, the fair value of outstanding / quality company which compound over a long time - so would you be ok to say, base case company A compounds at 10% for 10-15 years, I'll only sell if market is pricing a seemingly implausible outcome, say, 20% for 20 years (no hard and fast rule, but you get the drift). The result would still end up being that you probably 'hold forever' since market is unlikely to give us that kind of pricing, but you never know. Limitation is this becomes incrementally harder to judge for companies with new products/services and expanding TAMs.
On hold forever, I cant say it better than this ...
“Psychologically, I don’t mind holding a company I like and admire and I trust and know that it will be stronger than now after many years. And if the valuation gets a little silly, I just ignore it. So, I own assets that I would never buy at their current prices but I am quite comfortable holding them.
Well, I am almost constitutionally. . . I have a defect. And I just won’t pay 30 times earnings… I have never done that but I have one or two now which are now worth 8 or 10 times what I paid for them and they are still marvellous businesses and are still growing and I just hold them. Many investors I know are like me. I cannot defend it in terms of logic. I don’t defend this logic. I just say this is the way I do it and it keeps me more comfortable to do it this way. And I am entitled to this, it’s my own money and I am entitled to do it my own way. A lot of people are just like me. Li Lu is just like me. He will hold things that he bought a long time ago at tiny prices in what are still great companies but he won’t buy more.” — Charlie Munger
Problems I refer to are fundamental but not necessarily short-term detrimental. Loss of focus. Big M&A. Balance sheet deterioration. Shifting of business mix towards lower quality segments. Capital misallocation above a point. Market's indifferent to such things so long as they don't impact next quarter EPS. It's not that I worry about such problems before market. It's that market doesn't event think they're problems for the most part.
Great essay, learnt a lot!
Very well explained. Keep them coming!
Superbly written. Thanks.
Great stuff...quick question: Does Assertion 2 then imply that one should equal weight the businesses in the portfolio ? How to think about portfolio weights if there isn't a reliable way to rank companies by conviction or prospective risk-reward
Portfolio weights, concentration are linked to context, constraints, personal preference etc. My view: if highly selective, then back conviction with buying as much as possible. Since we build portfolio one company at a time (more like PE than typical public market investor), true concentration is known only later. We have loose upper bounds on concentration, but invariably hit 10% FPI shareholding limit well before that. Also, own forever implies that portfolio gets more concentrated over time as winners compound. So, no question of equal weight. In my context, portfolio weights are an outcome, not an input.
I meant equal weight when starting the portfolio, but understood your point and perspective.
Thanks
Great insights shared from a behavioural aspect of investing!
Very insightful. I would like to check on how does one decide on time to give for a holding, before deciding to look at alternatives?. The reason I ask is that, I have seen stock prices of some of my holdings stagnate in a zone for several years before a catalyst pushes the price out of the zone. I understand that building conviction and watching the business instead of the stock price movement helps us hold on if we see potential in the business. Now how much time would you give for stocks of such businesses to reflect their potential?, considering business quality is good, growth is in low double digits in a growing industry.
Also there is the opportunity cost of not getting the timing right and missing out on alternatives, how do you handle that?, do you test waters & incrementally build your position in the stock as your thesis plays out? or do you go all in based on your research?
So long as business is tracking on controllable metrics (e.g. market share, balance sheet quality, capital allocation, management actions), we hold tend to hold indefinitely. With hindsight, approach has worked even if a few stock-prices went sideways for many years. On 2nd question, our buying opportunities are so infrequent for our kind of business to get to our kind of price that we buy as much as we can, until (usually) FPI limit stops us.
Thanks Anand :-)
My reading based on their holdings data that is publicly available, is that they go all in, not incremental.
Thanks Nav :-)