zarley

Thanks guys. Thinking about this a bit more, I was really getting at portfolio composition, position sizing, scaling in and out of positions, simple hedging, etc. The timberland sale this morning was just the trigger for thinking about this stuff a bit more. I had hoped to hear how members of this board work that stuff in to the general framework of buying dollars for 50 cents and selling them for $1.50. As Parsad notes, as an individual, I don't have many outside considerations to worry about when making these decisions, so I have a little more flexibility to avoid trading if I want to. And, with a goal of minimizing costs and taxes, I intend to minimize trading as a general rule. With all that said, the individual decisions are all quite situational and may not be suitable for a more formal or rigid approach. Other than scaling in and out of positions and maybe using defensive options or stop-loss orders, what tactics are members here using to deal with the question of when and how to sell out of a position that has become fully valued or overvalued? With that, I'm off to read Klarman's thoughts.

I'll need to find the .pdf I have of MoS and take a look at that. Thanks for the suggestion. My thinking has generally been in line with your excerpt. At the end of the day the future appreciation for a richly valued stock is potentially quite poor or mediocre even if the business does well (see MSFT over the last 10 years). So, I'm comfortable with the notion that even if I like the business, if I can't justify the price (would you buy it today?), then selling needs to be strongly considered. I'm curious about how strategy-wise or tactically, how people approach the problem.

Yeah, that's the idea. But, the portfolio management/trading part of the sell decision is not something I've thought very hard about. My approach has really been about as simple as it can be, so I'm hoping to broaden my thinking about that.

This morning I sold the last half of a position I had in Timberland (TBL) at $36.44. I bought a year and a half ago at ~$13, thought it was worth about $20, sold half not long ago at $30. I'm ambivalent about it because I like the company and would have liked to hold it longer. But, It is near an all-time high and I've been planning on getting more defensive by raising cash, plus I wanted to add a little to some other positions that look reasonably cheap (cutting the flowers and watering the weeds perhaps). Obvious alternatives to selling would probably be buying a put, maybe a couple bucks below the current price, or just putting in a stop-loss order. How do you guys approach sell prices and taking profits?

Is that the one where he got hurt running into a guy because he wasn't watching where he was going? Framing that as a headshot is not quite accurate, IMO. If you watch the CBC feed of it, it's clear he just didn't see the guy, and both announcers agree it was an unfortunate accident, and not something malicious from the opposing player. Crosby is a tremendous hockey player. He is also a giant douche and crybaby. I don't like him, but I do hope he gets and stays healthy. The NHL is in desperate need of stars and he is the best in the league right now.

#1 is a good point. The goalie came out. It seemed more like they were just yapping, but leaving his crease is a no no. #2 goalie on goalie crimes don't count. As Buffett says, a horse that can count to three is an amazing horse, not an amazing mathematician. A goalie who beats up a goalie is a tough goalie, not a tough-guy. ;D

Believe me, I hate Cindy Crosby as much as anyone and I've seen plenty of youtubes showing his worst moments, so I don't disagree with you on that score. A third liner leaving the bench to defend his goalie is, IMO, defensible (not what you want to happen, but I can understand it). But, he better do it with full knowledge that he's gonna get suspended and fined. I think back to Steve Yzerman getting a 3rd man in penalty and a game misconduct jumping into a "fight" to defend a young Sergei Fedorov. Sometimes you need to get your team mates back, even if it means a penalty or suspension.

I agree with Mario that what the Islanders did friday was disgraceful. But, I disagree that the NHL didn't do enough to penalize them. Plus, it was a Penguin that left his bench -- defensible in context, but obviously begging for a suspension. Mario's always been sensitive to incidents of thuggery in the NHL. I think his wrist still pains him from a thousand cheap-shot slashes during the 90s.

I think my gut reaction to reading that letter was something along the lines of "how quaint." It seems to be equivalent to leaving a note on your big screen T.V. asking nicely that would-be robbers not steal it, as you are quite attached to it and would prefer not to have to replace it. If the author thinks Biglari cares one whit about small investors and their desire to be voting partners in BH, he's delusional.

Just curious how many employee options/shares have been issued over the past 3-4 years? That's a good point. The way I look at it is to compare the net cost of repurchases and the impact that has on shares outstanding. Over the last 6 years (2004-2010), CSCO's shares outstanding has been reduced by about 1 billion shares, but CSCO has spent about $40 billion in aggregate repurchases over that time. So, they've spent nearly $40 per retired share at a time when the shares were trading in the market in the low 20's (sometimes over, sometimes under). My conclusion is that nearly half of their repurchase expense (a little under $2 billion per year on average) has been the cost of their options program. So, while they've certainly spent a lot on repurchases, half of it went into workers' pockets and not owners' pockets. I'm taking a hard look at CSCO right now because it does seem cheap, but not entirely convinced at the moment.

From what I've seen, SHLD has redacted some counter-party information in a filing regarding new letters of credit with Wells Fargo. Filing here: http://www.rocketfinancial.com/FetchDoc.aspx?id=12212206&fid=3076289 I can't say I know the details, but Rule 24b-2 is related to investment mangers 13F filings. I'm guessing the counter-party wanted confidentiality until they filed their own 13F. At some point, I guess we'll know who it is. Perhaps Fairholme or ESL.

Great update. Thanks for the link.

This is great and all, but they have such a menagerie of debt issues (convertable and not) that it's kind of hard for me to figure out if this means anything good for them. They get rid of some shorter duration convertables for some longer duration non-convertables with a double digit interest rate. That may be good for the shareholder because it reduces the future dillution potential, but costs more for ongoing interest expense. At the 50,000 foot level, I get the Level 3 story, and all of the tech momentum that is moving in their direction. But, I don't understand (1) how they convert capacity in to profits or (2) how the holders of the common fare in the meantime in the face of potential dillution. I get tempted by Level 3 (Netflix business FTW!!!), but then I look at the financials and the above questions and immediately slot it in the "too hard" pile. I'm fighting the urge to buy a small position as a gamble on the great upside story. Right now "I don't really understand it" is winning the fight against "the long-term demand for their services is huge."

Greenwald's Value Investing book lays out the basic framework for various types of companies and provides several good examples of how it should be applied. http://www.amazon.com/Value-Investing-Graham-Buffett-Beyond/dp/0471381985

I'm not sure why you draw a hard line between the two. It's not really a straight binary choice. I think the question is really just a matter of at what price to consider selling. The so-called jockey stocks may get more leeway here because there is such faith in management. I'd rather hold a fairly priced Fairfax than a fairly priced (or even a slightly cheap) generic small cap. Choosing to hold an over priced Fairfax instead of a cheap generic small cap would be something like irrational, but I don't think that's what we're talking about here.

I've been thinking along those same lines lately. BRK and Fairfax are my two biggest holdings, and they'll likely stay that way for a little while. I'm comfortable enough with management and the long-term outlook for them, and think both are mildly undervalued for the time being. When the valuation story changes, I'll reconsider their weightings relative to my other positions. I intend to hold these indefinitely, but if valuation gets out of whack, I'm prepared to sell them outright. It would be a nice problem to test my resolve on that issue in the next year or two. We'll see. I have about 10% cash at the moment, and a general lack of screaming buys, so I wait.

I agree about every investment having a price. As for the Apple and BRK hypotheticals . . . I can't imagine ever buying into something like Apple. The resurgence of the company and the stock was the result of good execution and some great product ideas that really hit the market at the perfect time (imac, then ipod, then iphone). I would never have had the foresight to recognize that Apple was on the verge of that kind of transformative product development. Early BRK with a greedy incentive package for Buffett is probably a harder question. I don't think BRK would be the BRK we know today with a shareholder-unfriendly compensation package for Buffett. As a small investor, I have to feel like I understand what is motivating management. I try to buy into businesses where I feel like my interests are aligned with managements. I'm comfortable with BRK and Fairfax in that regard because I've followed them for a while, and I think I have a decent understanding of management's motivations and decision making framework. In something like SHLD, I don't necessarily know what Lampert's long-term plans are (going private I'd guess), but since he owns so much of the common, our interests are aligned with respect to the benefits of long-term share price appreciation. Most (certainly not all) of my positions have significant ownership by individuals or families that actively run the business. I just don't think Biglari's interests are aligned with the small shareholder. That doesn't mean BH won't do well going forward, but Biglari will be better rewarded at the expense of the other shareholders. The price better be compelling if I'm going to play with the deck stacked against me.

. . . and perfectly happy to get rich at the expense of the other shareholders. This is the fundamental problem I see with Biglari: his motivations and incentives are potentially at odds with other shareholders. And, as Parsad notes, the Board does not appear willing or able to stand up to him or check his get rich desires (i.e., do their jobs). So, if BH got sufficiently cheap, it could be a decent investment. But, for me, if I know the CEO is out for himself and his incentives are not aligned with my interests, then that puts up a pretty high hurdle to get me to invest. Why would I want to if the CEO is working against me?

Always a great read. Thanks for posting.

Thanks Carl. A very interesting situation. Given my own personal constraints, I'll probably never understand it all well enough to own it directly, but it is an interesting story. Does this not, however, put the small/individual shareholder in a relatively poor position? And so, we get back to the quality of the people in charge.

Shouldn't that be "or" ? But, yes, the return might be underwhelming in the near-term. But, if Level 3 is eating your lunch, and/or critical to you service it might be acceptable to have a modest accounting return in the near-term to improve your overall competitive position.

I'll apologize in advance for really not knowing much about Level 3. I do have a geeky layman's understanding of the unavoidable move to streaming media vs. broadcast media and what seems to be an evergrowing demand for bandwidth. So, given a market cap of under 2 billion, why wouldn't Comcast, or a Verizon or a Cisco or some other big telco/network player just buy Level 3 outright? If the value of the pipe is that great, why not sail in with some spare change and buy it whole? Serious question.

I tend not to read 10k's just for the sake of reading 10k's. I dig into them to find information about the company that isn't generally available in other places -- I go in looking for something specific (usually more detail about assets, investments, debts, compensation, etc). Yes, I will also read things like the mgmt discussion and more general business descriptions but you can often find that sort of thing in presentations and press releases. The goal is to understand the business/industry. So, the 10k is useful for filling some gaps, but it's just one piece of the puzzle. For me, the other pieces include 10Q's, other SEC filings, conference call transcripts, company/industry presentations, general business articles, industry-specific articles, executive profiles, opinions of respectable professional investors, etc. I only go this far if the financials look good from a quick review (cash flow & balance sheet mostly).

Exactly. McConnell and Boehner have made it pretty clear that their legislative agenda revolves around making Obama a one term president. Expect them to stonewall any proactive attempt to fix anything that might give Obama something positive to campaign on in 2012. Mid 90's redux is what I'm expecting. Only economically, we're not in nearly as good a position as we were in the mid-90's so the stonewalling will likely be detrimental overall.

This is an important point to remember, and one that keeps me lukewarm to MSFT generally. Yes, they look attractively valued, and that $40 billion in cash is nice. But, you need to be able to do something smart with it over time that produces a worthwhile return. The last 10+ years don't provide much evidence that MSFT can put that money to good use, and the Yahoo deal is a reminder that they may very well do something incredibly stupid with the money.