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Jack of All Trades, Part 2

September 25, 2013 | About:
The Science of Hitting

The Science of Hitting

236 followers
In a recent article, “Jack of All Trades, Master of None” (here), I talked about the importance of being selective; I made the point that you don’t need to have an opinion about every stock in order to do well over time. I suggested getting to know the best companies that you can find intimately, and then waiting patiently to buy those names when given the opportunity to do so.

I received a bit of flak for a statement I made in the comment section; to be clear, I thought the reader made a fair point, and I completely understand where he is coming from. Here’s the paragraph that the reader pointed to (bold added for emphasis):

“And on JCP I have not sold a single share; at the same time, I haven't bought any either, and will not be doing so (with all but 100% certainty). I made a commitment to be a business owner when I bought the shares and am seeing it through; I'm hoping painful lessons are more likely to be remembered....”

Like the reader, you may find that statement a bit odd. Why would you willingly give up the option to use the liquidity offered by publicly traded equities? Shouldn’t you dump a stock when it approaches intrinsic value or if you realize you’ve made an error – whether it’s been three weeks or three decades?

I’ll leave that unanswered for a minute. I think there’s a statement from my most recent article, “The Real Definition of Intrinsic Value,” that’s related in many ways. From the article:

“At times, waiting patiently can be disheartening, or even boring (three-quarters of the way through 2013, I’ve yet to place a single buy or sell order). But eventually, the tide will turn.”

That nine-month period is the longest I’ve gone without placing a single trade since I first started investing; take a second to think about the longest you’ve gone between trades in your career, and how long you’ve waited on average. I think that for most people (including myself – I’m way ahead of pace assuming I’ll be an investor for decades to come), this likely clashes with Warren Buffett’s “20-Hole Punch Card” idea in a big way; if you’re buying a stock every quarter and invest for a few decades, it’s easy to eclipse your allotted punches by a factor of 10. The point isn’t to focus on the number, but what it suggests about the due diligence required for sound decision making.

I was reading through my investment journal this weekend, and came across an applicable quote from “The Snowball” (or so I believe - I didn’t note the source at the time): “After the Cap Cities deal, in 1985, he [Warren] went for three years without buying a single common stock.”

Again, ask yourself – what’s the longest you’ve gone with doing nothing? The investment that followed that 1,000-plus day waiting period has become the most well-known investment of Buffett’s career; it’s amazing that this preceding fact is an all but forgotten part of the story.

Here’s what Buffett said about their inactivity in the 1987 shareholder letter (written February 1988):

“Whenever Charlie and I buy common stocks for Berkshire's insurance companies (leaving aside arbitrage purchases, discussed later) we approach the transaction as if we were buying into a private business. We look at the economic prospects of the business, the people in charge of running it, and the price we must pay. We do not have in mind any time or price for sale. Indeed, we are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate. When investing, we view ourselves as business analysts - not as market analysts, not as macroeconomic analysts, and not even as security analysts.

Our approach makes an active trading market useful, since it periodically presents us with mouth-watering opportunities. But by no means is it essential: A prolonged suspension of trading in the securities we hold would not bother us any more than does the lack of daily quotations on World Book or Fechheimer. Eventually, our economic fate will be determined by the economic fate of the business we own, whether our ownership is partial or total

We really don't see many fundamental differences between the purchase of a controlled business and the purchase of marketable holdings such as these. In each case we try to buy into businesses with favorable long-term economics. Our goal is to find an outstanding business at a sensible price, not a mediocre business at a bargain price….

At Berkshire, we have found little to do in stocks during the past few years… However, Mr. Market will offer us opportunities - you can be sure of that - and, when he does, we will be willing and able to participate.”


(Mr. Market presented an opportunity shortly thereafter – with Berkshire (BRK.A)(BRK.B) acquiring a stake in Coca-Cola (KO) with a cost basis approaching $600 million over the next 12 months.)

That’s an amazing admission: “We do not have in mind any time or price for sale.” I made a comment a few weeks ago that suggested the same thing for Phil Fisher. In reading through “Common Stocks and Uncommon Profits,” one thing jumps off the page: When Mr. Fisher talks about selling, he doesn’t even address the idea of a stock increasing beyond some measure of fair value (No. 3 and No. 6). He seems to be focused on buying the best companies with serious growth ahead – and then holding on tight. That’s so foreign to what we hear today – with analysts being, as usual, the most prominent example of the short-term mindset that encapsulates many market participants.

Why do Buffett, Munger and Fisher take such an approach? An argument can certainly be made that Warren’s talking his own book: Berkshire is so large (at this point) that it cannot realistically move funds without incurring huge costs (of course leaving taxes unrealized is part of the rationale for such an attitude as well); it’s simply too difficult to take any other approach.

I think such an approach makes sense because it completely changes your viewpoint; you’re not going to care much about short-term fluctuations if you plan on staying put for years to come (more often than not, I find myself rooting against my investments – so I can buy more).

I made a multi-year commitment when I purchased a stake in J.C. Penney (JCP), and I will see it through; at the same time, it’s really opened my eyes to just how difficult retailing can be. I’d hear it many times before, and knew well about Buffett and Munger’s time as the owners of Hochschild Kohn – but apparently that wasn’t enough to stop me. I looked at the company’s financials early on and believed that it would not take too long for customers to return if the new concept was abandoned, with historical profitability returning shortly thereafter. That assumption has proven to be far too optimistic. By the way, this doesn’t fall on the shoulders of Ron Johnson, Bill Ackman, Steve Roth or anybody else; that is my own error.

Looking forward, what effect will such an approach have on my investment results on average? As one’s time frame is extended, changes in market multiples matter less and less; the returns of the underlying business and its staying power becomes increasingly important (spotting an impeding change can be an arduous task). Why does this matter? I believe there’s a limited subset of market participants who think about stocks in this manner; from analyst reports to blog posts, there seem to be very few people that focus on those underlying returns.

Again, I want to reiterate – I completely understand how others view this differently. I do what works for me, and others should do what works for them. I want to buy great businesses when they are undervalued and watch my returns match (or exceed if purchased cheaply enough) the underlying returns of the business in question.

The temptation to stray from this approach is prominent; it’s so easy to get caught up in the noise and fall prey to the liquidity discussed earlier. When every tick starts to look like a reason for euphoria or despair, fair value estimates (amazingly) start to converge closer and closer to current market prices. Before you know it, buy and sell prices are within spitting distance of one another – implying a level of knowledge about the future that is, for lack of a better word, laughable (assuming one believes intrinsic value is based upon discounted future cash flows).

It’s much easier to say you’re an investor than to actually act like one (how many stocks in your current portfolio would you happily own if the market closed for the next five years?). By the way, trading pieces of paper works for some; more power to them (in the words of Charlie Munger, “Someone will always be getting richer faster than you. This is not a tragedy.”).

I take a different view - in a world of traders, I believe that thinking long term is a clear advantage over the competition; I’m looking at factors most market participants never think about (not because I’m any smarter than them; just like I don’t look at the technical indicators, traders would find no value in thinking about the long term trend of ROA or market share).

Most importantly, I think this approach can narrow the core questions down to a handful - is the underlying profitability of this business protected by a moat with room to grow over time; how does management’s capital allocation stack up over time; and does the valuation understate conservatively expected results by a wide margin? If you can answer those two questions, I don’t think you need to worry about Fed tapering, the current Schiller P/E for the S&P 500, or the impending government shutdown. With enough patience – which can mean years of waiting – I don’t have any question that Mr. Market will eventually give you an opportunity to act.

This all comes down to selectivity. It reminds me of what Charlie Munger says about ethical behavior: When there’s a big whirlpool, you don’t want to come within 20 feet and just barely miss it – you want to go around by 500 yards. I don’t want to play a game where I’m tempted to invest in a stock at “X” and start judging my success a month later when “X” is at 95% or 105% of its original value. I don’t think it is naturally for human beings to take the vicissitudes of the market lightly; remaining level-headed as stocks start moving is easier said than done. I don’t want to see if I’m capable of playing this game – I want to completely avoid it if possible. I don’t want to nibble on the edges of dozens of stocks, buying at 16x earnings to dump at 18x.

I want to find a handful of companies that I can own for years. When they’re cheap, I want to accumulate shares in a big way. If I'm not comfortable with an investment being 10% of my portfolio, I don't see a clear reason why I would want it to be 1% either. I'd rather wait for something better if that's the case. In the words of Charlie’s grandfather, “When you find one, my dear grandchildren, and you can clearly recognize it, seize it boldly and don’t do it small.”

As always, I’m happy to hear from readers who think differently than I do; thanks for reading!

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

Rating: 4.3/5 (26 votes)

Voters:

Comments

swnyc2
Swnyc2 - 11 months ago
BRAVO!

(But, by the same logic, if you realize your original thesis was in error, and you no longer believe you are holding stock in a company that has favorable long term economics, you should sell the stock.)
aagold
Aagold premium member - 11 months ago


Science,

I just noticed this from your "about the author" description:

"On the sell side, I'll generally spread my sells over a few trades at 5-10% intervals as I approach my estimate of fair value; with the truly great businesses, I demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of outsized returns and time on intrinsic value."

Ummm.... isn't this a bit inconsistent with what you wrote in this article? It seems to me you're really struggling to justify this arbitrary constraint of holding on to any stock you've bought for at least a few years, regardless of what new information comes to light. Isn't that just an excuse to bury your head in the sand when things change and engage in "thumb sucking", as Warren calls it?

I really wish Warren Buffett was willing to read our discussion about this issue and tell you what he thinks, because I'd be willing to bet a lot of money that he'd disagree with what you're saying here. Yes, of course it makes sense to think long term and to avoid the types of meaningless short-term noise so many traders get caught up with. And yes, it's also true that years can go by without an intelligent investor taking any action whatsoever - that makes perfect sense in certain circumstances. But to say that you're going to have an iron-clad policy of never selling a stock you've bought unless you've held on to it for a few years, regardless of what new information comes to light, or how the current price compares to a conservative estimate of *long term* intrinsic value, or what other opportunities are out there - I'm sorry, but that just makes no sense (sorry to be so blunt).

- aagold

sapporosteve
Sapporosteve premium member - 11 months ago
Science,

I can understand you wanting to hold for a longer period than most, but given JCP dropped 18% yesterday and is down another 8% in pre-market due to a Goldman Sachs credit assessment, this brings the year to date decline to 46%. Now if you bought in around $20, then you need JCP to more than double just to get back to your starting price (I admit I dont know what you bought at).

Even the great Buffett bailed out when he believed after a rational assessment that he had made a mistake.

I think retailers will bounce back and respond to online sales etc but I think they may be a lousy investment for a while yet.

I noted you said you would not be buying any more, but at what price would you need to consider that your thesis is wrong and maybe get out? Even a business owner realises that there are times to sell and move on.

regards

Steve
The Science of Hitting
The Science of Hitting premium member - 11 months ago
Swnyc2,

That's certainly true; I think the point is to try and get to a level of preliminary analysis that would result in that happening on all but the rarest of occasions. If buying the type of companies I'm talking about, there really shouldn't be anything that can pop up in a short period of time (say, one year) that wasn't present or worth consideration prior to purchase. The mixture of a truly great business and sound analysis prior to purchase should eliminate most of these situations (two things I'm continuing to work on); thanks for the comment!

The Science of Hitting
The Science of Hitting premium member - 11 months ago
Aagold,

The part you highlight is really the main question: do I go into a purchase with an exit price (estimate of fair value) in mind? We can see Warren's quote from above, and I added my two cents on what I drew from Fisher's writing (others may disagree). I'd say that in the past, I was much more focused on determining fair value, and selling as the stock approached that level; I'm slowly moving towards an emphasis on buying great businesses and holding on for a long, long time (I will change my bio).

Does that mean set it and forget it? Well, we saw what Warren did in the early 2000's with KO, as it approached a price that many would consider quite expensive. Again, he has to deal with the size issue; in addition, he was on the board at the time, which would've made liquidating such a huge stake in the company uncomfortable, to say the least. He's labeled a few holdings as permanent, and so far has kept his word regardless of swings in the market; his approach seems to be to sit still when they get expensive, not to sell or seek other opportunities (as you suggest).

I'd like to address your last point:

"But to say that you're going to have an iron-clad policy of never selling a stock you've bought unless you've held on to it for a few years, regardless of what new information comes to light, or how the current price compares to a conservative estimate of *long term* intrinsic value, or what other opportunities are out there - I'm sorry, but that just makes no sense (sorry to be so blunt)."

I don't want get locked into an iron-clad policy (as you call it); these articles shouldn't be read as a proclamation of policies from which I will never stray. I use this as a sounding board in what I consider an evolving investment approach, one which is greatly improved by reader comments (like your own). I don't have all the answers, and am working like everybody else to find something that fits.

I'm simply saying that one should not take partial ownership in a company if they are not comfortable with the prospects for that business over a period of years to come. Some (most) people don't agree with that; they trade pieces of paper day after day. More power to them; but I have no interest in playing that game. The best way to not play it - and to avoid thinking as such - is to eliminate it entirely.

I might miss some opportunities to make money over the years with such an approach, which is fine; I think it will keep me out of trouble, and it's an approach to investing/business ownership that works for me. We have a good idea of what Warren thinks from his own activity in BRK.A, KO, and others. Certainly he's considered new information as it's appeared; but he has not bought or sold (in the case of KO) for many, many years - and in the case of BRK.A, he went many decades (with current selling tied to philanthropy). With See's, he has said he wouldn't sell it for multiples of what it is worth; he doesn't seem to keen on doing what you're talking about.

Straddling the line, as you discuss in your final paragraph, is easier said than done. I think the best way to go about it is avoiding the line entirely and staying as far to the long side - and away from the herd -as you can. Again, your approach may differ.

Thanks for the comment!
The Science of Hitting
The Science of Hitting premium member - 11 months ago
Sapporosteve,

Forget the movement in the price of the stock (or JCP in particular); the point is that I'm making investments with the plan on being an owner for many years. I committed to doing so with JCP and am sticking to that commitment.

Now the question becomes, what happens if things change? As we see with JCP, the situation has changed dramatically in a short period of time; the business was never very good to begin with, and has got materially worse in the past eighteen months.

What is the lesson to be learned? I think it is to avoid company's like JCP; throw it in the "not interested" pile and move on. There will be somebody to buy it, and maybe they'll make a ton of money; this is not a tragedy.

I personally want to focus on companies where the underlying fundamentals will not change so drastically - as they've done with JCP - in such a short period of time. I think the rest of my portfolio is a better reflection of that approach.

"Even a business owner realizes that there are times to sell and move on."

I don't want to be in situations where that's the case, especially in a period of months/quarters; I want to own great companies and stick with them for years or decades to come. That will undoubtedly limit my opportunity set; that's a trade-off I'm happy to make. Thanks for the comment!
aagold
Aagold premium member - 11 months ago


Science,

I'd like to point out a few relevant points:

1) Buffett makes a clear distinction between Berkshire-owned subsidiaries vs. marketable securities when it comes to owning a business "forever". He's made it clear that as long as a Berkshire subsidiary isn't losing money he won't shut it down or sell it, but that's not the case for marketable stocks (i.e., partially owned businesses).

2) Besides the difficulties you mentioned, such as selling KO when he was on the board or the difficulty in selling a huge number of shares, there are tax constraints he's under as well. As Munger put it once, Berkshire isn't structured correctly to actively trade stocks. There would be too much double taxation - corporate income tax paid on capital gains if Berkshire sells at a profit, and then shareholders would have to pay capital gains taxes again when they sell their Berkshire stock. As a result, he's almost forced to hold stocks "forever" unless they become clearly too risky.

3) Stocks don't have feelings. If you sell one it won't feel bad. In fact, it won't even know. I'm always having to tell my sister this when I sell a stock in her account that's done well for her.

4) I'd like to point out a subtle distinction between "being prepared to own a stock forever" and "owning a stock forever". When I buy an undervalued stock, I'm *prepared* to own it forever. As long as management is operating the business correctly, and is allocating capital correctly (which includes buying back their own shares if that's the best use of company cash), then if the stock price stays low for a really long time I don't care. In fact I'd probably use the opportunity to keep buying more. But that's a whole lot different than saying I *commit* to owning it forever (or a very long time). Why? 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 and make a huge IRR. And so would Buffett, absent the constraints talked about in #2 above. So there's a huge difference between being *prepared* to own a stock long term and *committing* to own a stock long term.

- aagold

The Science of Hitting
The Science of Hitting premium member - 11 months ago


Aagold,

Glad you're keeping the discussion lively! Hopefully others are reading and not just us going back and forth :)

1) That's true - and he's also made the point that there's no difference, i.e. both are ownership in that business. 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? What do you think that answer is for most people? That's the point I'm getting at...

2) Very true, and that's why I mentioned those difficulties (want to be fair / honest); of course, we have our own tax implications to consider as well. I'm not there now, but at some point I plan on being in the higher tax brackets, and it's probably safe to bet that they won't be 15% forever. Every investor, not just Warren Buffett, must consider the tax implications of their action, regardless of if the rate is 5%, 15%, or 50%.

3) True again. As an example, I don't own PEP because I think it's happy I've been it's friend for so long; I'm more concerned with the attractive ROA & ROE that it's put up year after year after year (the unrealized gains you mentioned above play a role as well).

4) Many people say that; then there's the important question: how many of your current holdings is that true for? Buffett hasn't pursued the in/out method you describe, and has done just fine. That's not to say you're wrong; I simply prefer his method and believe I can act more rationally taking that approach.

Thanks for your comment; look forward to your response!
batbeer2
Batbeer2 premium member - 11 months ago
Hi aagold

>> I'll dump it immediately and make a huge IRR

Dumping it is not what gets you the huge IRR.

Lets say I offered to sell you either a bank account with $10 000 and a 5% interest or a bank account with $3 000 and 15% interest. In each case, I want $ 7 000.

In real life, most people would choose the former, liquidate the account and claim an indecent IRR.

BUT

If you chose the latter, you'd do a lot better in the long run. If you're comfortable that the 15% is sustainable for many years, would you sell that asset to anyone else even if they offered you $20 000?

If you don't sell, it means you're hanging on to an asset with a p/e of 20 000 / (0.15*3 000) = 44 !

It depends on your horizon. That's subjective.
One Fine Turtle
One Fine Turtle - 11 months ago
Batbeer

excellent explanation
swnyc2
Swnyc2 - 11 months ago
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.

:)
aagold
Aagold premium member - 11 months ago
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
aagold
Aagold premium member - 11 months ago
Swnyc2,

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

- aagold
The Science of Hitting
The Science of Hitting premium member - 11 months ago
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!

vgm
Vgm - 11 months ago
"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.
The Science of Hitting
The Science of Hitting premium member - 11 months ago
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!
vgm
Vgm - 11 months ago
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!
The Science of Hitting
The Science of Hitting premium member - 11 months ago
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!
The Science of Hitting
The Science of Hitting premium member - 11 months ago
Meant BNSF! Getting my rails mixed up :)

vgm
Vgm - 11 months ago
I thought you'd just come off the rails... ;-)

Thanks for the response. It wasn't rambling at all.

Thanks again for the stimulation - and good luck with the compounders.
batbeer2
Batbeer2 premium member - 11 months ago
It seems this thread is broken..... the rest is here.

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