Seth Klarman (Trades, Portfolio) gave an interview directly from the Baupost headquarters for the Ben Graham Center for Value Investing in 2009. As you recall, during that time Baupost was openly active and buying assets when most funds were overly pessimistic about the environment. While I certainly recommend you to go through the whole interview, one of the most interesting comments stemmed from the question: How do you decide when to sell something?
"We never hold on for the last nickel. I think you do a big mistake when you do that. First of all, we never assume something will go past its fair value. A lot of times people will fall in love with something and buy stock at 10 and think it's worth 20, but it's acting so well when it hits 20, that they hold on until 25 and it's no longer value at all. Not that you shouldn't re-assess if you decide it really has added-value, that this is better than I thought, that retained earnings bring the value higher, that's ok, but to just go along with it because it acts well is irresponsible."
Klarman's comments are very logical but may be very hard to follow sometimes. It is true that as investors, we tend to get the best (or worst) out of our emotions. We suffer from anchoring bias, which is sticking to our intrinsic value calculation and refusing to sell until it is realized. In another part of the interview, Klarman mentions that valuations are so subjective and dependent of variables that the best way to go about them is to find an adequate range of values.
Once we figure out the range of according values, we should stick to those and start selling, no matter the price of the stock. This will also improve our discipline in investing only when the margin of safety is big enough to make a profit even at the low part of the range.
As the saying by John Maynard Keynes goes, "As the facts change, I change my mind." It is very important to re-calculate intrinsic value when new information comes out. Intrinsic value is rarely affected in a drastic way over the course of a few months, but, nevertheless, it is something that we should keep an eye on.
As Phillip Fisher said, quibbling over eights and quarters is a sure way to lose money. Learning from great investors as Klarman, we can avoid leaving money at the table as we avoid getting fearful or greedy.
What do you think?
