As a young teenager, one of my favourite rock albums was by Led Zeppelin and the title track was ‘Stairway to Heaven’. While the music was truly spectacular, I had no clue about the profundity implicit in the lyrics. Last weekend the penny dropped when my daughter, only half in jest, enquired whether I had managed to acquire any investment wisdom considering my labour of love for the past 25 years. Even though I sheepishly admitted that the ‘Holy Grail’ was nowhere in sight, it struck me that selling smart is probably the single most important element of investment success over the long-haul. In fact, I would dare to go one step further and suggest that accepting losses promptly is the key to investment nirvana.
The current generation of investors has been brought up on a drip-feed of pithy Buffett aphorisms. Among the best known is, “My favourite time frame for holding a stock is forever.” When asked what might be the downside to such an approach, St. Warren commended the methods of the renowned comedian, Will Rogers: “When the stock doubles, sell it.” And in case it fails to double? “Well, don’t buy it in the first place!” Clearly, the appeal of buy-and-hold investing is significant for most non-professional investors with other pressing commitments on their time. Not only does this strategy greatly magnify the power of compounding, it also helps in keeping taxes down and permits the investor to develop a more nuanced understanding of the business over time.
However, more often than not, one is too early to the party and the wait can be fairly embarrassing. In addition, the problem with a truly long timeframe is that in a fair number of cases the dynamics of the business begin to shift gradually which counter-intuitively has a disproportionate impact on price. Read Warren Buffett and Coke or the Washington Post. The experience of your columnist with Infosys has in many ways been equally instructive — the total returns, including dividends, for the eight-year period commencing March 31, 2000 were way less than what the post office had to offer.
Private equity investors looking to buy a business typically have a holding period between three and five years. While too short a horizon typically leads to over-trading and disastrous results, it is vital to establish a finite exit point in order to have a realistic understanding of ‘intrinsic value’ and judge what management can realistically achieve. So, buy-and-hold is a sensible approach provided the fundamentals remain in good shape and in line with what can be reasonably expected but ‘forever’ might stretch both intellect and judgment to the brink.
While remaining disciplined in terms of the process of stock-picking, the seasoned value investor waits patiently for Mr. Market to provide opportunity. Typically, there are just four reasons to sell:
The most common failing may stem from having blind faith in Newton’s laws of gravity! It is a fatal mistake to think that what goes down must go back up. Do names like Torrent Cables, Ashapura Minechem, Steelcast et al ring a bell? “Dead money” does insidious damage to the sensible portfolio, not by falling precipitously and then getting stuck in a narrow range, but far more by preventing redeployment of the same capital in distinctly superior opportunities. Another shortcoming plagues those who believe “you can never go bust taking a profit.” Amazingly, you can if you are not equally nimble in trimming the losses.
(This story appears in the 12 August, 2011 issue of Forbes India. To visit our Archives, click here.)
I thought your favorite was Pink Floyd's Comfortably Numb!! Hope all is well!
on Oct 24, 2011Sensible article. Along with the Art of Selling, one also needs to learn the Art of Partial Profit Booking. Cassidy's book really helped me in honing my selling skills.
on Aug 9, 2011