Modified buy and hold

Subtitle: Short versus long term: Why not both?

Is Saul a short term or long term investor? My answer: who gives a rip? For all TMF’s preaching about being a long term investor, I think what many of us overlook is actually the short term! But let me take a step back.

The Long Term

I think it is crucial that Saul will only buy stocks with long term potential. I couldn’t agree more, and I can’t imagine buying a stock just hoping for a 10% pop or something. But long term potential means two things:

  1. We’re not in for a quick X% (on earnings, news, or whatever that we expect will drive the pop) and then to get out

AND

  1. The stock ACTUALLY has room to run, because the company actually has room to grow. In the KB, Saul talks about finding companies whose revenue and profit could double or triple or more. I have no interest in the “lumbering behemoths” of the world like MMM or JNJ. Sure they may be incredible companies, pay a steady dividend, even beat the market over a period if you buy at the right time…but you have no hope of getting a 30%, 50%, or 100% return in a few years. “Saul stocks” (sorry but the term is convenient) always have that potential.

The Short Term

But this is equally crucial: Saul isn’t just content to buy and hold forever despite all of the shorter term things that are going on with a company. This seems almost too obvious to say, except that I hear the opposite all the time from the Motley Fool. I can’t understand why you’d hold something you feel is not a good for the short term.

If you buy things that are frothy, you’re going to lose a lot of money on at least some of them. TMF stance: Sure, FEYE is down 75% or whatever, but if you hold it until 2030 you’ll forget all about the THREE FOURTHS of your original investment that were lost. Well maybe so, expect there are at least 2 problems with this:

  1. The opportunity cost – Perhaps the stock does eventually rebound to what you bought it for, and goes on to do great from there, but when? How much could you have made on your money by then if you’d been in something that was doing well the whole time - something where you didn’t need several years just to get back to where you started? By the time your stock has gone down and come back up in the “short term,” something else will have doubled.

  2. It’s really hard to predict what will happen 10, 20, 30, or more years from now. Sure, it’s hard to predict what will happen in the short term, too, but see Saul’s quote at the very bottom of this post.

Saul doesn’t just buy and hold forever without another thought. He knows the companies and what’s happening with them in the short term. No one can say for certain that SKX, for instance, will remain popular and profitable for the next 30 years. But we know how it’s being run today and believe as long as its being run that way, it will be a great investment. So OF COURSE we need to keep tabs on the company to make sure it’s still being run that way! That’s part of our investing thesis! If that changes next year, I will sell. But if I just buy and hold for years and years, well, a lot can happen.

Conclusion

As I understand it, Saul’s approach is always keep his money in the companies he has the highest conviction about. In my opinion, that’s the best way to go, period. An the only way to do this is to be a long term AND short term investor.

Sometimes that means holding a stock for years. Sometimes that means ducking and covering. Sometimes that means getting back in. Sometimes that means waiting.

Never ever buy a company that doesn’t have long term potential. But never ever buy a company that doesn’t have short term potential, either. As Saul says in the KB:

If you look at two stocks and say to yourself “This one is a Sell and that one is a Buy,” don’t you think that on average the ones you think are buys will do better? I’d bet a bundle that, on average, the ones you figure are buys will do better than the ones you figure are sells! If not, why are you bothering to evaluate stocks at all?

Live long and prosper, my friends.

-Bear

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Thanks Bear,

That’s a wonderful concise summary of my philosophy!

Saul

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If you buy things that are frothy, you’re going to lose a lot of money on at least some of them.

Bear, I always look at the Frothy Multiple before making a decision on a stock. Always.

:wink:

Cheers,
Mj

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This is all fine providing you never present your results without factoring in tax, which can make a significant difference and is why so many good investors emphasize compounding. ‘It’s not what you make, it’s what you keep that counts.’

It also gives a clearer picture to state the annualized return. If the holding was sold, that would again be the annualized return after tax.

It is no good citing a return which has not actually ended up in your pocket!

I’m a few days late to this, but there’s a couple points that jumped out at me:

I have no interest in the “lumbering behemoths” of the world like MMM or JNJ. Sure they may be incredible companies, pay a steady dividend, even beat the market over a period if you buy at the right time…but you have no hope of getting a 30%, 50%, or 100% return in a few years.

That didn’t seem right to me, so I went to the charts. If you bought JNJ any time in 2012 (range of 61-72) and sold any time in 2014, you had a return of somewhere between 30% and 80%. If you bought MMM in January of 2013, you had nearly a double in January 2015. This excludes dividends. Of course I am cherry-picking, but the point is we should not assume large stable companies can delivery great returns.

TMF stance: Sure, FEYE is down 75% or whatever, but if you hold it until 2030 you’ll forget all about the THREE FOURTHS of your original investment that were lost.

I’m not sure that is the TMF stance. I do know that once FEYE is down 75%, that’s already happened. It doesn’t matter how much of your capital is lost or how long it will take for you to earn it back. It only matters whether the remaining money is better of in FEYE versus somewhere else going forward. Also worth considering: FEYE is now up more than 50% from its February 12 low. There are a few other stocks followed around here that could have matched or beaten that return – but almost all of them were as performing as poorly as FEYE at the time.

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mnadel,

Point taken on MMM and JNJ. My point holds, but I was a little off on the numbers I threw out. I should have said that you can beat the market or maybe even double the market’s return if you buy at the right time, but you have no hope of achieving returns of several times the S&P. If you look at mid 2012 to present, the S&P is up around 50%, MMM around 90%, and SKX is up about 400%.

That’s it. That’s the top. Surely this post must prove it!

I think you will certainly find JNJ, and probably MMM have been in some of the best investors’ portfolios for decades. When contemplating selling from time to time, they have had the special ability to go to a dark room and lie down until the feeling went away.

It’s all about compounding. You hope to achieve ‘returns of several times the S&P’? No, no - you cannot be serious! You will be something of a phenomenon as an investor if you can beat it by a good margin over the years. You were joking of course.

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Ben Graham talks about defensive and aggressive investors in The Intelligent Investor. 3M would most certainly fit in a defensive portfolio but maybe not in an aggressive one.

Denny Schlesinger