A question for The Pauls, Mark, Ed….

8th Sep by David Wordsworth

8 comments 712 reads

First, thanks for all your hard work. Apologies if this is in the wrong place, or been asked before.

I saw in a some Fin Ed piece a while ago Warren Buffett said a good way to view stocks is that you had a ‘book’ of coupons- rather like stamps I suppose- and say you had 20-30 ‘stamps’ as opportunities to buy stocks in your lifetime.

Obviously the point of that is to advocate patience, avoid churn, promote prudent buying with conviction etc.

I was very influenced by Ed’s advice in the ‘multibagger’ talks that you can’t ‘ten bag’ if you top slice a ‘two bagger’, but there often seems to be pressure to review the next opportunity……

I get the impression some of you have different windows in terms of how long to hold an equity- but maybe <5 years is possibly the consensus.

Do you gents still think Buffett’s advice holds as true in the 2020s/30s as it did in the previous 50 years?

Many thanks

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WarrantStar

8th Sep

I don't think there will be much consensus on what a typical holding period should be. It should depend on what strategy is being followed. Eg I follow a momentum based strategy which is more akin to trading than investing. So my typical holding period would be a few months. At the other end of the spectrum some people buy quality companies with the intention of holding them for very many years. There are many other strategies, but each should have a typical holding period which works well with the rest of the strategy.

Mark Simpson

9th Sep

That's an interesting question. I think the heart behind Buffett's idea of a punch card is the belief that the average investor jumps into an investment with too little thought or analysis. Knowing that you only have a few holes on the punch card really makes you think about whether you should be investing or not.

This can be a helpful thought experiment, particularly if one is prone to rash action. However, I'm not sure the concept was ever meant to convey that we should only be long-term investors or that being highly concentrated is a good idea for all. Indeed, I think even Buffett has been overconfident and overly concentrated in the past. Despite obviously possessing great investment skills, I think at least some of his early success can be attributed as much to luck (see my book for an example.) Buffett's long-term holding period seems to be as much a function of scale and difficulty trading in size than a purely philosophical position. Indeed, in his early years, he traded much more.

I think the real benefit is looking at our own investment history and learning where we make mistakes. If I have a tendency to sell too soon and see things multibag after I've sold, I should try to find a way of hanging on (perhaps using momentum as more of a trading signal, for example.) If I have a tendency to do well initially but hold for many years with a stock going nowhere, then I need to be more active in my selling.

David Wordsworth

Thanks for this, Mark. Very insightful.

Agree re Buffett- he’s said several times he has so many hundreds of billions he struggles to trade in a manner that will move the dial for Berkshire Hathaway significantly.

I may add that an investing folly we may all be prone to is alluded to in your last sentence- namely and element of self criticism when you’ve not invested/divested ‘perfectly’, yet even great investors cannot do this to that standard.

I think we’d be happier investors if we worked to reframe what success looks like so you don’t feel dissatisfied with an 80% gain when a 100% one was available. You still made a considerable amount of money.

Edward Croft

10th Sep

It depends on your approach and the type of company you prefer to research/invest in.

My take

If you are a value investor, you often benefit from mean-reversion of valuations. If you are not investing in quality value, then you'd naturally just sell when the valuation reverts to the mean. Holding period may be up to 2 years. Opportunity cost is a real issue in value investing.
If you are a quality investor, then you are aiming to benefit from compounding - i.e. capital being reinvested at high ROCE to drive equity value. Some companies don't stay high quality forever, but if you really can identify great companies with lasting business models, then yes forever is possible. Compounding only works over long timeframes - so it really ought to be a multi-year approach. You may need to reassess company quality on a consistent basis. Capitalism is competition. Competition eats margins.
If you are a momentum investor. You are aiming to benefit from trend continuation. Timeframes will be shorter. You are really riding a wave. You likely don't want to hold forever. Momentum tends to invert after a holding period of 18 months or so...

Obviously, the three above are extreme archetypes... but really, the only forever approach is a focused compounding quality approach.

"Pressure to review the next opportunity" - that's an internal psychological trigger which can be managed. The external prompt often comes from social platforms and news. News is dominated by PR (which is a negative). Social platforms (including here) create a sense that everyone is doing better than you, and there are better opportunities. It's important to manage that aspect. Ultimately, your strategy and execution are down to you. I prefer to put strategy first.

For me, it's less about the stocks, more about the factors driving stocks (QVM etc). Once you have that mindset shift, it's very hard to have your head swayed by the next great stock. Nonetheless, it's always rather nice to keep one or two slots in your portfolio when your head really is turned. Personally - I need that pressure release valve. That discretionary aspect gives me a greater sense of agency.

Alphaflight

"The stockmarket is a device for transferring money from the impatient to the patient" - Warren Buffett

Paul Hill

11th Sep

Hi David - in short 'Yes'.

The point I think Warren Buffet is trying to make to investors - is to be very selective & thoughtful with your stock picking.

If you only have '20-30' opportunities in your lifetime to buy shares, then choose wisely. Why waste any of them?

Far too many people, spend far too little time/effort researching, monitoring and learning about the fundamentals of a business. Instead, they simply punt on the next big thing, without properly understanding what they own.

Plus Mr Buffett - who runs a super concentrated portfolio - adds "you don’t have to swing at every pitch." Just patiently sit there and watch pitch after pitch go by - and then thump the one right in your sweet spot.

12th Sep

I've tried to answer the question about holding on to multi-baggers using real data here: https://www.stockopedia.com/co...

Tl:dr - the full set of past multi-baggers are more likely to be losers rather than winners, so the uncomfortable truth is that we shouldn't hang on to multi-baggers! However, there are some ways we can improve the odds by avoiding the type of multi-baggers that are likely to give back all those strong returns.

14th Sep

Thank you all for your comments.

I think you all provide compelling arguments for your positions- Ed and Mark from a slightly more ‘quant’ base, and Paul from an experienced/empiricism POV.

I think one of the highlights of this community is understanding the different approaches to equity selection, as much as the great ‘real world’ advice (Stockranks, NAPS etc). I appreciate all of the contributions (although not convinced re Paul Scott’s naïveté re OnlyFans! ;)

It would be interesting to get you all on a talk together with your thoughts around these points, and I’m sure the subscriber would find it educational. Would be an interesting ‘Christmas Lecture’ from the four of you……..

A question for The Pauls, Mark, Ed….

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David Wordsworth

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