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Jack of All Trades Part 2
Posted by: One Fine Turtle (IP Logged)
Date: September 26, 2013 07:08PM

Batbeer

excellent explanation



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Jack of All Trades Part 2
Posted by: swnyc2 (IP Logged)
Date: September 26, 2013 08:56PM

Batbeer2,

Ignoring tax considerations for the moment, if one believes one is holding an overvalued stock, isn't the question what to do with the cash if the position is liquidated?
If there is another opportunity which is a substantially better investment, the stock should be sold.

Taxes merely make the hurdle slightly higher in terms of how much better the opportunity needs to be.
I suppose it's possible not to have an alternative investment that is more attractive than an overvalued stock, but there are generally a lot of opportunities out there.

Batbeer2, using your example, I would spend $7k to buy the bank account with $10k and liquidate it immediately. I would then buy the account with $3k earning 15% interest for $7k, and have $3k to spare.
:)



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Jack of All Trades Part 2
Posted by: aagold (IP Logged)
Date: September 26, 2013 09:42PM

Science:
1) I don't know the answer to your question, but yes, I'd say Buffett's average holding period is extremely long compared to most people's.

4) You asked, "how many of my current holdings is that true for?". I'm not sure which part of my statement you're referring to. I've never really measured it, but I would guess I hold my average stock for around 2 years. Right now my largest positions are SRT, PCC, and EQU. I don't think any of them is one of those wonderful companies I'd like to own forever because it has an inpenetrable moat that will allow it to earn a 15% ROIC in perpetuity. (For example, PCC is an amazingly bad business trading at a deep discount to TBV and should have been liquidated long ago... but I couldn't get enough other large shareholders to agree with me). I'd love to find one of those wonderful companies trading at a reasonable price and hold it forever, but I haven't found one. Ironically, I did own BRKB for around 6 years, which was the longest I've held any stock, but I sold it when I found too many other higher-expected-return opportunities I couldn't resist. I kind of regret selling it now, especially since I can't find anything I like anymore, but frankly its ROE isn't that great and I don't think it's undervalued enough to initiate a new position.

Batbeer:
In my statement I wrote, "Because if Mr. Market becomes manic instead of depressive very quickly, so my stock quickly moves from being underpriced to being overpriced, I'll dump it immediately "

The definition of "overpriced" is highly dependent upon how good the business is. A business that can truly grow earnings at 15% per year (on average) for the next 50 years, while maintaining a prudent capital structure, is indeed worth a very high multiple of current earnings. But it's not worth infinity, as even Charlie Munger admits. So if the price of this wonderful business becomes *so* expensive that its multiple exceeds even a deserved very-high threshold, then it makes no sense to hold onto it any longer, even if you've held it for only a short time. That's why I feel a "commitment" to hold onto a stock for the long term, regardless of how irrationally priced the stock may quickly become, or regardless of what new information about long-term prospects comes to light, doesn't make any sense.

- aagold



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Jack of All Trades Part 2
Posted by: aagold (IP Logged)
Date: September 26, 2013 09:44PM

Swnyc2,

Your answer to Batbeer was perfect... that's exactly what I would do! (Wish I thought of that answer.)

- aagold



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Jack of All Trades Part 2
Posted by: The Science of Hitting (IP Logged)
Date: September 27, 2013 07:08AM

Aagold,

I was referring to the fact that many people say they're willing to hold forever (or call themselves long term), yet consistently find ways to avoid doing so; I misspoke, and didn't mean to suggest you say / said that. Your explanation says a lot - you're fine with owning poor businesses that you believe are really cheap; obviously as this discussion has shown, I'm not interested in that space.

Thanks to everybody for keeping a good discussion going!




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Jack of All Trades Part 2
Posted by: vgm (IP Logged)
Date: September 27, 2013 01:57PM

"I'd be curious to know what was the shortest period of time Warren held a stock within the past 20-30 years; would you think it's over/under one year?"

Science -- Buffett bought two Irish banks during the recent crisis (probably Allied Irish and Bank of Ireland). These were not mega-buys, but he confessed they were significant amounts of money, $200-300M if I remember well. He then dumped them, at a loss of at least 80%, after a very short space of time - less than a year I'd be willing to bet.



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Jack of All Trades Part 2
Posted by: The Science of Hitting (IP Logged)
Date: September 27, 2013 04:43PM

Vgm,

Yeah, Warren talked about the investments in the 2008 letter (published in late February 2009), saying the following:

"During 2008, I spent $244 million for shares of two Irish banks that appeared cheap to me. At yearend we wrote these holdings down to market: $27 million, for an 89% loss. Since then, the two stocks have declined even further."

Naturally the write-down suggests the positions were still held at that time. I have seen nothing since then to suggest those positions have been sold; would you mind pointing me to a source for that?

Thanks!



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Jack of All Trades Part 2
Posted by: vgm (IP Logged)
Date: September 29, 2013 06:37PM

Science,

Thanks. He went on to describe them as "unforced errors". I don't have proof positive that he sold. But those investments would still be down at least 95% today, after massive dilution and further drops in price.

A comment Buffett made at the 2009 Meeting is relevant to this - and relevant to your article(s) in general too I think. When asked by a shareholder why he would hold stocks "forever if the fundamentals change", Buffett replied 'We don't - we sell plenty. If we lose confidence or conditions change, we sell.' Conditions most definitely underwent a permanent change for Irish banks. This comment from Buffett would also support one of aagold's points.

Like others above, I'm scratching my head as to why you want to be so rigid with your strategy. In particular, JCP would appear, even by your own admission, to be at best a mediocre company - struggling further as we speak, and with a management which seems covert. You want to stay with it, but don't want to buy more even as the price has halved. OK, but you need a rationale as to why you believe you'll eventually be proven right. Your stated intention to buy the best companies and hold for the very long term of course seems to be right, but if JCP is what you end up with, isn't something arguably wrong with your process? Are you confident your analytical abilities will allow you to meet your admirable goals?

Your posts make me stop and ponder and I relish that. Thanks!



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Jack of All Trades Part 2
Posted by: The Science of Hitting (IP Logged)
Date: September 29, 2013 07:49PM

Vgm,

"Your stated intention to buy the best companies and hold for the very long term of course seems to be right, but if JCP is what you end up with, isn't something arguably wrong with your process? Are you confident your analytical abilities will allow you to meet your admirable goals?"

You've hit the nail on the head; if I'm going to follow this approach, I likely cannot make investments like JCP. I don't think it's the process that is wrong; rather, I think it will be refined with time so such errors are not repeated (I will not be buying another struggling retailer anytime soon, if ever). By the way, I'm not close to being on Warren's level, nor do I follow his approach to the letter; I will make errors again in the future, but will continue to work towards what fits for me.

My hope is that my analytical abilities continue to improve - and that when it's a close call, I walk away and wait for something that looks clearer. This is easier said than done, or at least it has been for me in the past; I believe that I've done a much better job as of late being realistic with myself in that regard.

The point isn't to be rigid; it's to avoid the process of buying bad companies with the hope of grabbing that final puff. What you guys point to as rigidity, I consider a checklist item of sorts - is this a good business? And if it is, am I willing to own it for years? If it can change so much that the answer to the second question is unclear, that would suggest I should not move forward from there.

I'm not sure I can be successful buying bad businesses and hoping they'll turn, and I know it makes me uncomfortable (owning JCP has not been a fun experience); the best thing to do, from my perspective, is avoid this completely in the future. Others dabble with a bit of everything - more power to them; personally, I need to be focused.

I will be passing on future investments that look like JCP because they do not fit into this process/approach; that's a trade-off I feel I need to make going forward. It would be like if I found a company trading below NCAV; there's a very good chance I would not invest, because it is not an approach that I'm fond of or comfortable pursing. That doesn't mean it is wrong - it simply is not a good fit for me.

In regards to Buffett saying they sell plenty, that is simply not the case for the best decisions they've made in the past few decades. Berkshire's value is embedded in a few key decisions - See's, Union Pacific, Coca-Cola, American Express, GEICO, Wells Fargo, and others; they account for the majority of the corporations value and aren't going anywhere. Think about the value that has been created from those handful of decisions, which can be summed up as buying a great business at a fair/cheap price and holding on.

The rest of the stuff - including the investment in Irish banks, silver holdings in the late 1990's and 2000's, and others, simply pale in comparison to those investments (for reference, the UNP purchase was ~110X larger than the Irish banks investment).

Here's what Ben Graham had to say about GEICO in the 1971/1972 edition of the Intelligent Investor:

"Ironically enough, the aggregate of profits accruing from this single investment-decision far exceeded the sum of all the others realized through 20 years of wide-ranging operations in the partners’ specialized fields, involving much investigation, endless pondering, and countless individual decisions."

Those are my thoughts, which seem to me like a bunch of rambling; sorry! :)

Thanks for the comment!



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Jack of All Trades Part 2
Posted by: The Science of Hitting (IP Logged)
Date: September 30, 2013 01:00PM

Meant BNSF! Getting my rails mixed up :)




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