Philip Carret is one of history’s most underrated investors. Carret started one of the first mutual funds in the U.S., and his investment career spanned eight decades, during which he made a name for himself as one of the most patient investors ever.
Carret played an important part in Warren Buffett (Trades, Portfolio)’s education as well. As the story goes Carret traveled to Omaha in the mid-1940s, where he met a broker named Howard Buffett.
Buffett recommended a company named the Greif Brothers Corp. (GEF, Financial), a barrel maker, to Carret, who brought the stock for 68 cents. Carret continued to hold the stock until at least 1997, when it traded at $36.50. Warren Buffett (Trades, Portfolio), Howard's son, later called Carret “one of my heroes” and said he had “the best long-term investment record of anyone in America."
Jason Zweig discussed Greif Brothers and some of Carret’s later investments:
“Over the years that little maker of wooden barrels diversified into cardboard boxes, multiwall bags and fiber drums. The stock split many times. Each share that Carret bought at around $15 is now equal to 40 shares of Greif Bros. Co., worth $1,505.
Carret doesn’t hold all his stocks for 48 years, but he really does hate to sell. By buying into Blue Chip Stamp Co. in 1968 he ended up with shares of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) at a cost of 235 (recent price: 16,300). He bought Neutrogena Corp. at around 1, split-adjusted, in 1977 (recent price: 18 ¾); Arden Group, which operates supermarkets and distributes fax machines, in 1961 at 10 (recent price: 40); Calcasieu Real Estate & Oil Co., a Louisiana-based property outfit, in 1964 at 52 cents (recent price: 1 ½ ).”
Carret had 12 basic "commandments of investing":
- Never hold fewer than 10 different securities covering five different fields of business.
- At least once every six months, reappraise every security held.
- Keep at least half the total fund in income-producing securities.
- Consider (dividend) yield the least important factor in analyzing any stock.
- Be quick to take losses and reluctant to take profits.
- Never put more than 25% of a given fund into securities about which detailed information is not readily and regularly available.
- Avoid inside information as you would the plague.
- Seek facts diligently, advice never.
- Ignore mechanical formulas for value in securities.
- When stocks are high, money rates rising and business prosperous, at least half a given fund should be placed in short-term bonds.
- Borrow money sparingly and only when stocks are low, money rates low and falling and business depressed.
- Set aside a moderate proportion of available funds for the purchase of long-term options on stocks in promising companies whenever available.
This list helped him achieve his long-term investing record, which in today’s world of high-frequency trading and quarterly portfolio rebalancing seems unrealistic. Nonetheless, Carret liked to hold stocks for the long term and did not sell until something went wrong -- the central thesis of his investment strategy, and focus point of this article.
When to sell
Trying to decide when to sell a stock is one of the hardest parts of investing. However, Carret had a simple principle for selling, one that ran through his entire strategy.
Specifically, Carret would only buy good companies and sit on them as they grew. As the business expanded, he profited. The only time he needed to consider selling was when something went wrong, as he described in an interview in 1995:
"It is very simple; buy good companies and sit on them. There are good well-managed companies, which are a relative handful. There are companies that have moderately good management, which at least are not going bankrupt but probably are not going to give their stockholders glowing returns. There are companies which are over-leveraged — they owe a lot of money and are skating along on thin ice; when things get tough they are going to go bankrupt. So the job of an investment manager is to pick the good [companies] and sit on [their stock for many years].
One of the great faults of investment analysts is to try to put limits on what they recommend. They say, for example, 'Here’s a stock selling at $12 [a share]. Sell at $18 a share.' That’s nonsense. If that’s all you expect out of it, leave it alone. If you buy it at $12 and you think it might double, one should feel comfortable in buying it. Probably the greatest performer in recent history is Berkshire Hathaway. [Berkshire Hathaway Inc., based in Omaha, Neb.] I bought the stock about 10 years ago at $400. Imagine how I’d feel if I sold it at $800. [It was recently selling at more than $24,000.] Why sell anything unless something goes wrong?"
Disclosure: The author owns no stocks mentioned.
