Selected excerpts from the Knowledgebase -9

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Selected excerpts from the Knowledgebase -9

I’ve decided to do a daily small excerpt from the Knowledgebase as sort of a thought for the day. In many cases they will have extra thoughts of mine, or small updates. I hope you’ll find them interesting.

Saul

Here’s the ninth:

You’ll read a lot of propaganda about how you should almost never sell. However, if you make a well thought-out decision to sell several stocks for what you perceive to be good reasons, and then make an equally well thought-out decision to buy several replacement stocks for what you also perceive to be good reasons, it’s simply not plausible, and it’s even silly, to claim that you won’t end up better off. It would imply that your judgment in picking stocks is not only terrible, but actually reversed!

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?

I’m not saying my replacement stocks always do better than the stocks that I’ve sold. What I’m saying is that I do my best and use my best judgment, and over time I expect that companies I think are going to do well will, on average, do better than companies I think will do poorly. (If not, I should just put it all in an index fund.) I may sell a particular stock that outperforms my replacement stock over the next quarter, but so what? I’m not perfect. That’s how I think about it anyway.

Why hold on to your failed positions? They have little going for them except that you are already in them. I doubt you would dream of buying most of them now if you weren’t already in them. I just don’t think you should hold on to a poorly functioning company on the basis that it might transform itself into something successful some years in the future.

Saul

For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column
on the right side of every page on this board

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Saul:

I don’t think there is any propaganda about never selling. You would have to sell for various reasons and some that are not even associated with the outlook in the business.
I think the advice is to be slow at selling and not to sell when you cannot have any idea of how a momentary weakness will affect future outlooks. Of course you may have more confidence in holding if you bought in with a long view of where the business would be going otherwise any short term drawback will appear to be a losing position. It’s a bit like looking to the far horizon when driving rather than looking at the end of the car’s hood when you drive at 80mph down the highway.
If you have a long view, you would be more comfortable in doing nothing. Doing nothing is often the best thing to do. The caveat is that you need to have time on your side. If you want to see a gain every quarter or every year then it would be a different game- a game more akin to trading. I know you don’t view it like that but I think holding a couple of years is not the long view in my book. There is certainly a lot that can happen in the business in two years but I like to keep my eye towards the long haul. This is similar to investing in a child. There are certainly optionalities and surprises (pleasant and unpleasant) but you invest in someone/something you really think will be much bigger many years or decades later. You give it time.
Are there reasons to sell mid-way? Certainly. When there is smoke coming out of that hood, you should definitely pay attention and not try to look through it at the horizon. But it can be a mistake to sell too soon, and you expose yourself to another risk of picking another stock that may not turn better than the one you abandoned.
You say you don’t look at it after you sell it. That’s fine. But maybe you could get some lessons from an error you made? If you don’t then there will never be anything challenging the way you have done things. The future is somewhat dependent on what happened before. So some think that looking back at what happened to a business (not a stock) before and after your sell could help you understand how a business could from a position of apparent weakness or perceived weakness at the time become something great. If you sell and don’t look back, you won’t learn that. But maybe you think that what happened to one business never applies to the next? I have some sympathy for this kind of thinking. Every one business trajectory is different from any other. That is true. But couldn’t you find any ‘history does not repeat but rhymes’ type of insight? When you believe that every business is different, would any effort to learn from the experience you had with one business or stock totally useless?

tj

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Saul makes a straightforward, rational and plausible argument. Logically it is so. It is clearly so for Saul and I sustain the pride that it is for me.

However, empirically it is not so. The fact is that over a realistic investment timescale of 20 years (which is the essential preliminary clause preceding any discussion of results) nearly all fund managers of such tenure fail and the ones (or more accurately one) that succeed can be put down to what chance would predict in the well-known coin-flipping analogy.

We can therefore assume that, despite the drag of fees, most individuals fail also.

I think Saul is clearly right however, because he refers to a static portfolio of stocks. That would not be dynamic like a well-chosen selection of ETFs, each one regularly eliminating some companies and adding others.

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However, empirically it is not so. The fact is that over a realistic investment timescale of 20 years (which is the essential preliminary clause preceding any discussion of results) nearly all fund managers of such tenure fail and the ones (or more accurately one) that succeed can be put down to what chance would predict in the well-known coin-flipping analogy. We can therefore assume that, despite the drag of fees, most individuals fail also.

Hi streina, You have to take into account that fund managers work at an enormous disadvantage to us.

  1. A “small” fund has perhaps $50 million dollars. Many times what we are investing.

  2. If the manager has a good year, people pour in money (maybe up to $200 million, soon to grow to $500 million or a billion) and he is forced to put it all to work by the rules of his fund. Investing large sums he can only invest in huge companies without moving the market, or very many small companies he can’t keep track of.

  3. People bail out when the market falls, forcing him to sell at the bottom, and pour money in when the market is high, causing him to buy when values are inflated.

  4. He has his bosses and the public looking over his shoulder each quarter with his job at stake, which has to influence his judgement in perverse ways that I can’t even begin to imagine.

Results of fund managers have very little to do with what an individual investor like you or me can do. He’s trying to turn a boat the size of an oil tanker, while we are maneuvering a speed boat.

Saul

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Saul,

“Results of fund managers have very little to do with what an individual investor like you or me can do. He’s trying to turn a boat the size of an oil tanker, while we are maneuvering a speed boat.”

You have used that statement before and I now understand what you mean. I joined MF back in June and now have six stocks in my portfolio, but it is a very small percentage of my over all investments. Blackrock manages the rest in different funds, with my six stocks I am beating the pants off of the funds that Blackrock are investing. I only have myself to worry about while they have thousands of clients to please including me.

I am thinking about pulling more money out of Blackrock and investing it on my own, any thoughts on this are welcomed.

brian

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All good points which I completely accept. But there are undoubtedly a great many fund managers, often independent, who keep to their remit, indeed this is of course the only way actually to become a ‘star’ fund manager (one who, for twenty years or more… etc.). Nevertheless most clients come up against the drag of the fund’s fees on their results showing how tight the margin of success is - for most.

Your own success is due to what I might call ‘rapid and unrestricted intuitive action’ and few investors are inclined that way, though many fund managers are and their results are usually poor. So more power to you! It certainly makes for an interesting board.

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“Results of fund managers have very little to do with what an individual investor like you or me can do. He’s trying to turn a boat the size of an oil tanker, while we are maneuvering a speed boat.”

You have used that statement before and I now understand what you mean. I joined MF back in June and now have six stocks in my portfolio, but it is a very small percentage of my over all investments. Blackrock manages the rest in different funds, with my six stocks I am beating the pants off of the funds that Blackrock are investing. I only have myself to worry about while they have thousands of clients to please including me.

I am thinking about pulling more money out of Blackrock and investing it on my own, any thoughts on this are welcomed.

That’s exactly what I did about 25 years ago. I managed some and had some in funds. As I realized I was beating the funds regularly, I moved more and more into my own management, until I ended up eliminating funds entirely.

Saul

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