Ok, here’s a paradox for you, the long-term investor.
You already know that owning, that is buying at reasonable prices and steadfastly holding on to good quality businesses, run by good quality managers is likely to be quite profitable over the long term.
And so, based on this belief, you construct a portfolio of such businesses and plan to hold on to it for a long time, allowing the magic of compound interest to do its magic and after you make these investments you are fully invested.
But then after a while you get some cash and that’s what creates this paradoxical situation. Which is that you are no longer willing to buy more of what you already own (because they are too expensive now) but you don’t mind holding on to these businesses you love so much.
And then you meet a trader friend who is quite successful and he politely tells you that you buy your portfolio every day. That is, holding on to a position is the functional equivalent of selling it and immediately buying it back (ignoring transaction costs and taxes). And so if you’re not a buyer anymore of a position you own, then you should be a seller.
I have struggled with this paradox for many years and have written about it in the past (in my interviews with Vishal Khandelwal of Safal Niveshak) and elsewhere where I have basically said that for long-term investors in high-quality businesses, the rules for buying a stock and those for holding a stock are not the same.
In arriving at those conclusions, I was, in part, inspired by the writings of Philip Fisher in his wonderful books and also by the following three quotes by John Maynard Keynes and Ben Franklin.
“The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave causes, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only.” — Keynes
“As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.” — Keynes
“Keep your eyes wide open before marriage, half shut afterwards.” — Benjamin Franklin
Well then, on 20 December, I had the privilege and honour of meeting Charlie Munger over a wonderful lunch hosted by Howard Marks. Over two hours, I was mesmerised listening to Mr. Munger speak about many topics.
Here’s what he said about this particular topic:
“Psychologically, I don’t mind holding a company I like and admire and I trust and know that it will be stronger than now after many years. And if the valuation gets a little silly, I just ignore it. So, I own assets that I would never buy at their current prices but I am quite comfortable holding them.
Well, I am almost constitutionally. . . I have a defect. And I just won’t pay 30 times earnings… I have never done that but I have one or two now which are now worth 8 or 10 times what I paid for them and they are still marvellous businesses and are still growing and I just hold them. Many investors I know are like me. I cannot defend it in terms of logic. I don’t defend this logic. I just say this is the way I do it and it keeps me more comfortable to do it this way. And I am entitled to this, it’s my own money and I am entitled to do it my own way. A lot of people are just like me. Li Lu is just like me. He will hold things that he bought a long time ago at tiny prices in what are still great companies but he won’t buy more.” — Charlie Munger
If you agree with Philip Fisher, Charlie Munger, Li Lu (and me) on this, then, please spend some time contemplating the consequences of what Ben Franklin meant (in the context of investing,) when he talked about marriage: that you must keep your eyes wide open before marriage but half shut afterwards. This is especially true when you discuss what you own with someone intelligent who doesn’t own it and especially when you think about the whole situation in terms of what Richard Thaler calls the “endowment effect.”