I wrote this note to our subscribers recently. Names of companies are not investment advise and we may or may not hold them in the model portfolio
Hope you find this note useful
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I have identified myself as a buy and hold investor for a long time. I started investing in late 90s and was looking for a guru/north star at that time. This was the start of the internet era and unlike today, there were no online resources on investing
I came across Warren Buffett through a book – The Warren Buffett way and was hooked by his persona and investment philosophy. As it usually happens, once you admire someone, you tend to follow almost everything they say or do
Buy and Hold (or hope?)
One of the core tenets of Buffett’s philosophy has been buy and hold. I have embraced this philosophy whole heartedly in the last 20 years. Even though there was a degree of blind faith in following this approach, I have been amply rewarded for it
Over the course of time, as I have thought about it, I have realized some nuances to it. This has made me question if buy and hold (as I practice) makes sense in ALL cases
The precondition to the buy and hold philosophy is that you buy a great business with great management and hold for the long term to benefit from compounding. If either condition is not met, one should not buy the business in the first place
I have often made the mistake of defaulting to buy and hold inspite of the management or business being below average instead of selling and moving on
Why is selling tough?
The reason is not difficult to see – selling is tough and there is always regret in hindsight. No matter what logic you use, there is always something to regret about
For example
- Follow a valuations-based sell approach and you get the case of Vinati organics where one should have done nothing
- Don’t follow the valuations/stage of the cycle approach and you get Piramal enterprises or Edelweiss where you overstay you position and lose all your gains and some
- Make a mistake in evaluating a business and don’t exit promptly and you get Shemaroo ent with an 70% loss
- If you like the business and management, but keep holding on, waiting for the business to turn, you end with an opportunity loss as with Thomas cook (I) ltd
- Sell early and you may end up with a Balaji amines and miss out on a multi bagger
I cannot think of an example where I did not have any regret. When one faces this situation, the natural tendency is to do NOTHING and hope it will all work out. I am trying to avoid that now
Make mistakes and fix them
We sold IEX and reduced our position in Laurus labs recently. If these stocks keep rising, I will regret selling early. I will make decisions against my natural instincts, expecting to wrong a few times. If I am wrong, such as in the case of IEX or Laurus labs, we can always turn around and buy the stock again.
If I am accused of flip flopping, I consider that as a compliment. My loyalty is to the portfolio and you (the subscribers) and not to the stock or the company we hold
Ps: In the list of companies above, I have shared the worst of my decisions in the last 10 years. There are more and it’s a long list. You can accuse me of making dumb decisions from time to time, but no one can say that we try to hide them. All my decisions and thinking can be accessed here and my public blog
