Buy and Hold vs. Churn and Burn

[Myth465]

What do you guys think.

 

I have 2 sets of stocks in my portfolio. Deep Value plays and Owner Manager plays. I planned on holding my owner manager plays for the long term, but find myself rethinking this strategy.

 

Do you all buy and hold looking for a steady eddie 15%, or churn and burn based on valuation.

 

At this point the lion share of my gains is coming from my deep value holdings, while a significant chunk of my capital is stuck with owner managers. I believe these managers will deliver 15% per annum but also want to do much better than that. Currently I have 3 options.

 

Buy and sell based purely on Value.

Buy and hold companies led by skilled allocators as long as they arent overvalued (currently doing).

Hold a token position in Owner Manager companies to watch them, but continue to deploy 90% of capital based on valuation. (leaning towards this, already have done with FFH, and will be buying more when I see a catalyst or turn).

 

I guess my biggest issue is I think this may be a fools rally and would like more cash. I like my deep value holdings, and can only really see myself selling some owner manager holdings which appear to be dead money for now (Loews, maybe FUR or FFH).

 

What do you guys do, think?

[Uccmal]

Myth, I dont know how much help I can be as I am often in the same debate.  I hold one owner manager stock of any significance - FFH.  I have held it via options until now.  That allowed me to have outsized returns while FFH stock price has done so little over the past 14 years.  Now I am going to slowly whittle it down to 30% of my total portfolio as a common stock.  It is a great holding in Retirement accounts where I cannot take tax losses.  I also dont like being so beholden to the insurance industry.  One dirty bomb, or major west coast earthquake, and its all over. 

 

The rest of my stocks were value plays when I bought them.  I have since been selling some such as PWF, HD, KO, and buying a few others.

 

I guess my biggest issue is I think this may be a fools rally and would like more cash.  How do you know?  I could make a case for the S&P 500 to go to new highs as easily as drop 30%.

 

Value stocks normally will protect us from stock market crashes.  That is the point of the margin of safety.  It worked from the 1930s until 2008, and then value managers got crushed like so many bugs.

 

No easy answers.  If there were alot more investors would get the outsized returns that we do.

 

[rmitz]

I also find myself grappling with these same sorts of questions, though my portfolio has a different sort of long term/short term bent.  The main stock I purchased as an "owner manager" stock is Berkshire, which is mostly via options.  Ironically, that's the one where I actually have a firm target range where I want to sell most of the holdings.  Everything else has started as a deep value or special situation.  However, many of them evolved into interesting growth possibilities, such as ATSG. 

 

I am leaning towards the "sit on my ass" approach with these situations, as the tax benefit involved in holding and letting it continue to compound is significant, especially given the continuation of the 15% long term gains rate.  There's also value in keeping some of these highly appreciated shares around to use as charitable contributions.  Beyond all that, I find determining full or overvaluation for my stocks to be difficult at this point.

 

I'm not seeing that many huge opportunities right now which would make me want to liquidate my holdings; though that is partially because I'm not looking that hard.

 

I have been playing around with small arbitrage situations and what not, and I suspect I will continue that.

[txlaw]

I tend to churn and burn, as you put it.

 

Other than Berkshire, Fairfax, and possibly Leucadia, I don't plan on holding any owner manager stocks for the long run.  Furthermore, for BRK, FFH, and LUK, these will only be small/token positions for me unless they are substantially undervalued.

 

For example, I was pretty heavy into LUK at a much lower cost basis than what it's trading at today, so I've taken most of that position off the table in the last month.  

 

Having said all of the above, I find myself fully invested at this point!  

 

I'm a little wary about being fully invested because I like to keep at least 10 to 15% cash on hand.  However, I really like my deep value positions, and I'm willing to sell my undervalued positions to buy into even more undervalued positions if we have a correction.  I also plan on having cash coming into the portfolio in the coming months that I will do my best not to deploy.  

 

[zarley]

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. 

[stahleyp]

Maybe I'm not that ambitious, but if I could get 15% a year with a steady eddie, I'd take that all day long. I mean, especially if you're young.

 

Klarman says that over the next decade or so, stocks won't do much at all. If you're getting 15%, that is just a tad better than the Sequoia fund over its life.

[sdev]

Would love to own owner managers that did 15% till the end of time. I'd rather relax than work so hard churning and burning.

[Zorrofan]

Myth, for now why not go 1/3 value, 1/3 buy-hold and 1/3 cash? Or simply divide the portfolio between the two and hedge against the downside. I don't think there is any one right answer, you have to do what you feel comfortable with. I do agree on the fools rally though, might be time to increase hedges.....

 

cheers

Zorro

 

What do you guys think.

 

I have 2 sets of stocks in my portfolio. Deep Value plays and Owner Manager plays. I planned on holding my owner manager plays for the long term, but find myself rethinking this strategy.

 

Do you all buy and hold looking for a steady eddie 15%, or churn and burn based on valuation.

 

At this point the lion share of my gains is coming from my deep value holdings, while a significant chunk of my capital is stuck with owner managers. I believe these managers will deliver 15% per annum but also want to do much better than that. Currently I have 3 options.

 

Buy and sell based purely on Value.

Buy and hold companies led by skilled allocators as long as they arent overvalued (currently doing).

Hold a token position in Owner Manager companies to watch them, but continue to deploy 90% of capital based on valuation. (leaning towards this, already have done with FFH, and will be buying more when I see a catalyst or turn).

 

I guess my biggest issue is I think this may be a fools rally and would like more cash. I like my deep value holdings, and can only really see myself selling some owner manager holdings which appear to be dead money for now (Loews, maybe FUR or FFH).

 

What do you guys do, think?

[biaggio]

Good thread.

 

No right or wrong way.

 

I would take 15% as noted above. At some valuation, they will not yield 15%(i.e. they will be overvalued), then you'll have to make a decision. The problem is you might trade into something worse.

 

I am trying to take the emotion out of it and trying to stick with my top 10 ideas or less (it should possibly be less than 10 ideas, but some of my ideas I have had for 10+ years)--stick with the highest quality businesses, selling at the largest discount to fair value, and enough cash (20% ??) to sleep at night and be able to take advantage of any bargains or market corrections.

[matjone]

Maybe the logical way to make this decision would be to take a look at your performance over the last decade or so and see how your picks have performed.  Then if you made assumptions about

 

1. what percentage of your picks are losers, and what your average loss is, and

 

2.what percentage are winners, and what your average gain is, and

 

3. average amount of time it takes for market to correct to your valuation

 

you can get a feel for what you can do on your own vs. what the owner/manager can do.

 

I've also thought about this.  I remember reading that Watsa said he thinks he can compound book value at 15%/yr.  As long as the price/book multiple doesn't decrease, which most of you seem to think is pretty unlikely, then 10 yrs from now you can turn a dollar into four with fairfax.

 

I've also wondered if Watsa is being modest or intentionally setting the bar low with his 15% assumption.  After all he has done quite a bit better than that in the past, albeit on a smaller base.  What do the more experienced board members think about this?  If you had to bet, what number would you pick for  fairfax's cagr  over the next decade?

 

 

 

 

[scorpioncapital]

I think you should be asking a more important question. If the really good owner-partners are going to earn 15%, then why are you having opportunities to make a whole lot more? Several possibilities are possible.. Why aren't THEY earning more than 15%? Some have said 'size'. But does this mean if you are too good you must necessarily be only marginally above average over time? Logic would then dictate that if you are small (most of us are) and good (questionble premise, but let's assume it) then you must not own ANY of these owner-manager companies. Since all of us are small, then the only question is how sure are you that you are good, that is the only question.

 

 

[merkhet]

I would hold the Owners set, and I would churn and burn the Deep Value set.

 

I would expect the former to be able to allocate capital correctly, but most Deep Value companies require a catalyst to get to fair value and post-catalyst, they may not have a lot going for them.

 

But I guess it should be stock specific.

[Myth465]

Thanks for so many high quality replies guys.

 

I guess my biggest issue is I think this may be a fools rally and would like more cash.  How do you know?  I could make a case for the S&P 500 to go to new highs as easily as drop 30%.

 

I should probably clarify. I have been gone for 2 weeks (had to get away and kill a few braincells) and upon my return things look great. Everyone is talking about how we have had 2 years of double digit returns and many expect the same going forward. All I hear about is tax cuts, record cash at the corporate level, and an up market. I do think the recovery is real, but I dont think the hype is. One shock to the system and we will head down, and we have several predictable shocks being set up (muni bonds, sovereign debt (EU, US, Japan), commercial real estate, upcoming fight over debt ceiling, political gridlock, oil price shock). Once a muni defaults I predict we will see mass hysteria until the state or feds bail it out. Anyone of these will cause a change in sentiment and apply downward pressure to stock prices.

 

I also hold quite a bit of oil and gas stocks. I like my stocks but dont like the hype surrounding $90 - $100 oil. I think oil should be about $80 or so, and know my stocks will get hit when oil finally moves back down. The stocks have particular catalysts which are independent of oil and gas prices. Over the last 4 years I have basically trained myself to worry when I hear happy talk and to be happy when things go down. Its interesting.

 

The solution inmo is to raise cash on the rally in preparation for the pullback. Considering my size, the best hedge inmo is to sell.

 

-----

 

Zorro here was the original plan. I am finding that most of my returns are coming from Deep Value, while a huge chunk of my capital is trapped with owner managers. Between ATSG, SD, and ATPG. I have done quite well. There were a few dudes in Deep Value, but most of the leaps have worked out.

 

I plan to allocate 40%-70% of my investments into a small, but diversified basket of Owner Managers who have skin in the game and cash on hand. I am hoping that these investors will act as a counter cyclical force during Market crashes. I believe they will have the skills and capital  (FFH, BRK, FUR, Loews) to expand their businesses by making great deals, buying chap assets, and expanding market share during a downturn. They should also do better then cash in up years.

 

I next want to invest 30%-60% of my assets into a diversified basket of deep value high reward securities. These securities should be of decent quality, but should have an attribute that has the potential to lead to outsized returns.  They could be businesses experiencing extreme stress (ATSG with DHL at 11 cents or SFK), be highly leveraged (URI during the market collapse), deep discounts to book value (CNA and FFH (with CDS) due to misunderstanding), or could be Leaps with a catalyst (FFH, ATPG). These securities may be riskier then the owner managers, but should deliver outsized higher returns.

 

Finally I want to have up to 20% of my total portfolio in cash on hand for downturns.

 

-----

 

Scorpion I am small and had a good 2010. I feel like that duck moving up in the world though, have to keep in mind everyone had a good 2010. ATSG and Oil during the moratorium (via leaps) inmo were easy 100% returns. I think Mr. Market will deliver a few of these to us each year. I trust Prem will get his 15% but not too much more. Size eventually weighs us all down. Its a problem I would like to have though.

 

The owner managers serve another useful purpose. I see myself as a business man of sorts and have learned more from the crop of 10 managers I follow than any book. I have done well in FFH and ORH, but Prem has helped me compound quite a bit of money in insurance. FUR has given me a firm bit of knowledge when it comes to real estate, which will be useful as I buy other REITs and eventually property. Not sure I would pay so close attention if I didnt own shares, which is why I am leaning towards a token 1% holding if the shares are fairly priced.

 

-----

 

15% is great but wont make me rich, or will make me rich quite slowly. I am quite sure L, FFH, BYD, LUK, and a few others are good for a lumpy 15%. That will include several years of 0% and a few years of 50%. Out of all the investors I admire, my favorite would have to be Ericopology and the Cornwell capital guys. I have done nothing but loose money on leaps, but am turning the corner with respect to timing / catalyst investing. As of now the only way to raise cash is to clip my owner managers or clip my winners mid catalyst. Both seem like crappy choices, but perhaps there are worse things in life.

 

 

[stahleyp]

Dude, myth, aren't you pretty young? If so, 15% a year will make you pretty rich. Your money will double in less than 5 years. So, let's say you're 40 with a million. At 45 you'll have more than $2 million. At 50, $4 million. At 55, $8 million...60, $16 million, 65 $32 million. Maybe I'm crazy, have low expectations (or both!), but $32 million is rich to me.

 

Now, if you're an old man, then I'm wrong ,and 15% a year won't make you rich. :P

[premfan]

The type of stocks i invest in are:

 

1.) Compounders= Company objective is to increase bv every year ( FFH, MKL, TTT(MCAF), BRK, LUK). In this group management is key plus previous track record of at least five years of increasing SE. Constant search to find these rare companies.

 

2.) Asset plays= Sum of parts greater than whole. Worth more dead than alive. Downside is clearly defined so i dont care about any growth or upside. Example SHLD

 

3.) A franchise or brand that is in the downswing= A franchise or brand that the street hates. New management taking over or anything that only temporary affects the brand in the short term. Usually the market overly  punishes these companies and under estimates the strength of the brand. I have to figure out how strong the moat and ecomonic goodwill the brand or franchise has. Example (kswiss,aeo, shld, garmin)

 

4.) Strong brand companies=  Great companies that need little capital to grow the  business. Companies that have pricing power and would thrive in an inflationary enivorment. These companies are rarely cheap. Ex (Ko, JNJ, Hans)

 

5.) Trend investing=  Basically joining a bull market or following the trend. The key is to be in the trend early which is hard. Basically not buying in the parabolic stage most likely buying in the middle level. Example mining companies

 

 

I prefer compounders over any of the other types. Ultimately price is the determining factor. So i dont pre mediate % allocation. I buy when the price is right for me. If compunders are cheap most of my capital  will be in that area. Trend investing i never do more than 10 percent . I try to have at least 10 percent cash at all times.

[ericd1]

Myth,

 

I like deep value and jockeys too...But as mentioned, sometimes deep value needs a catalyst, which may not appear for a long time. My level of patience has improved over the years because many times after I exit the position, it takes off...damn!  So I've learned to trust my initial judgment and wait...I'll give an idea about three years unless it turns south (15%-20%)...then I'll cut and run because I haven't been successful averaging down or waiting for the recovery.

 

Today I'm a lot more patience than 40 years ago and it has helped my returns.

 

 

 

 

[rmitz]

Dude, myth, aren't you pretty young? If so, 15% a year will make you pretty rich. Your money will double in less than 5 years. So, let's say you're 40 with a million. At 45 you'll have more than $2 million. At 50, $4 million. At 55, $8 million...60, $16 million, 65 $32 million. Maybe I'm crazy, have low expectations (or both!), but $32 million is rich to me.

 

Now, if you're an old man, then I'm wrong ,and 15% a year won't make you rich. :P

 

I think a lot of us here aren't looking at this not in terms of retirement, but in terms of having the option to drop out of the rat race.  The sooner one has the option to do that, the better.

[scorpioncapital]

What I'm suggesting is that it is irrational to hold owner-managers and personally selected deep value plays. The question is what is rational. Either you know what you are doing 100% or you don't. If you don't you hold the owner-managers or an index, if you do, you hold 0%. There is no hedging your bets with knowledge. It's not a gambling proposition, a weighted portfolio of well selected value plays ensures against 1 negative outcome, I just don't see how the two "styles" are compatible, it almost seems like people are hedging if they know nothing and gambling that they know something, just learn it well, know your limitations and there's no gamble. Problem solved :)

 

 

 

 

[ericd1]

Perhaps some of us realize our limitations  :)

[zarley]

What I'm suggesting is that it is irrational to hold owner-managers and personally selected deep value plays.

 

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. 

[benhacker]

I think some here should look deep within themselves and see if you are really being realistic.  Possibilities and expectations are not the same thing.

 

A 15% per annum return is not attainable over the long haul, Anyone who believes otherwise “should pursue a career in sales, but avoid one in mathematics.”

-- Warren Buffett

[Myth465]

I think a lot of us here aren't looking at this not in terms of retirement, but in terms of having the option to drop out of the rat race.  The sooner one has the option to do that, the better.

 

I feel old but am relatively young (27). Rmitz is correct, I am not built for the rat race, and would like to exit sooner then most. I will continue working, but its nice to do something by choice vs. having to do something.

 

I think some here should look deep within themselves and see if you are really being realistic.  Possibilities and expectations are not the same thing.

 

A 15% per annum return is not attainable over the long haul, Anyone who believes otherwise “should pursue a career in sales, but avoid one in mathematics.”

-- Warren Buffett

 

John Maynerd Keynes - In the long run we are all dead.

 

Newton - For every action there is an equal and opposite reaction.

 

Myth - For every Buffett quote, there is an equal and opposite Buffett quote. One has to keep in mind the context.

 

Buffett - If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.

 

Now I am no Warren Buffett (probably shouldnt even be mentioned in the same book, let alone on the same post or page), but I didnt bother learning all this for 15% on a low six figure portfolio. As I said before I hope to have the high class problem of having to put large amounts of capital to work.

 

What I'm suggesting is that it is irrational to hold owner-managers and personally selected deep value plays. The question is what is rational. Either you know what you are doing 100% or you don't. If you don't you hold the owner-managers or an index, if you do, you hold 0%. There is no hedging your bets with knowledge. It's not a gambling proposition, a weighted portfolio of well selected value plays ensures against 1 negative outcome, I just don't see how the two "styles" are compatible, it almost seems like people are hedging if they know nothing and gambling that they know something, just learn it well, know your limitations and there's no gamble. Problem solved :)

 

I believe you are on to something. Originally it was a hedge against ignorance. Now its more of a historic thing. I will need to noodle on this one a bit. You have a point, either one knows what he is doing and invests his own cash or he doesnt....

 

[beerbaron]

What I'm suggesting is that it is irrational to hold owner-managers and personally selected deep value plays. The question is what is rational. Either you know what you are doing 100% or you don't. If you don't you hold the owner-managers or an index, if you do, you hold 0%. There is no hedging your bets with knowledge. It's not a gambling proposition, a weighted portfolio of well selected value plays ensures against 1 negative outcome, I just don't see how the two "styles" are compatible, it almost seems like people are hedging if they know nothing and gambling that they know something, just learn it well, know your limitations and there's no gamble. Problem solved :)

 

 

What about delegating to the owner/manager because of time constrains, not everybody is a full time analyst. Finding good use for 100% of a portfolio is harder then 50%.

 

BeerBaron

 

[Zorrofan]

Scorpion,

 

Why do you think it is irrational to use both approaches? To take your statement to the ultimate, I should only hold one stock - the one I think will give me the highest return. However, I hold more than one stock because I might be wrong. I don't think of that as irrational, rather I think that is prudent. Not being confrontational but interested in your reasoning.....

 

cheers

Zorro

 

 

What I'm suggesting is that it is irrational to hold owner-managers and personally selected deep value plays. The question is what is rational. Either you know what you are doing 100% or you don't. If you don't you hold the owner-managers or an index, if you do, you hold 0%. There is no hedging your bets with knowledge. It's not a gambling proposition, a weighted portfolio of well selected value plays ensures against 1 negative outcome, I just don't see how the two "styles" are compatible, it almost seems like people are hedging if they know nothing and gambling that they know something, just learn it well, know your limitations and there's no gamble. Problem solved :)

 

 

 

 

[stahleyp]

myth, how much do you feel you need to get out of the rat race?