tooskinneejs

oec2000 said: "So, someone comes along and offers you 50% more than you paid the year before. Do you accept the offer?" I'm positing that sell decisions should be based on a comparison of current market price to current value, not on a comparison of current market price to past cost basis. jackriver said: "The main thesis of that extension is to apply the same principles as Graham, but focus it on excellent businesses (the Munger add on) and never sell because the probability is high it will surprise you to the upside for decades." I agree that excellent businesses should be sought and purchased when available at compelling prices. But just so we get resolution on the theoretical issue of whether to ever sell or not, I offer this admittedly unrealistic and extreme example: If I offered to buy your Berkshire A shares from you right now for $700,000 each would you sell them? I think the answer is yes, despite the fact that the business is an excellent one. Why, because I'm offering you more value for selling than for holding. Second, because you know that Mr. Market won't let this mispricing last forever and that you'll be able to buy the shares back for significantly less in the future (i.e., much closer to their intrinsic value). woodstove - i agree with your thoughts.

"That's a damn good counter, but it's somewhat flawed because even though you're making me a higher offer, we are unable to set a present value on that 60%." Who said we need to compute a present value? I didn't say anything about the timing of my payments to you in exchange for the rights. Since we don't know the young man's earnings until the year he earns them, let's assume that I'll pay you for each year's earnings at the end of each year (i.e., instead of receiving 50% of his earnings at the end of year 20XX, I'll pay you 60% at that time and you'll hand over the 50% to me). Will you sell the rights to me? I believe the answer is an obvious yes. And the reason is that you will receive more value by selling than by holding the rights. In the real world of investing, we do have other issues to deal with such as present values and uncertainties of cash flows, etc. But in my rhetorical question to you, I'm trying to first isolate your assertion in the previous thread that one should never sell an excellent business (in this case, an excellent stream of cash flows) for any price. In this case, one should in fact sell the excellent stream of cash flows if the compensation is greater than the value of the cash flows. Now this is a silly example of course, because no one in their right mind would agree to pay you more than the value of that stream of cash flows, right? And yet, this is what happens in the stock market from time to time (on a present value basis of course).

"Someone mentioned that since we make buy decisions based on the difference between price and value, we should logically make sell decisions on the same basis. If this strategy were workable in practice, why are there so few successful "value short sellers"..." Your response doesn't answer the question. So I'll pose it once again, this time more directly: Why does "holding no matter what" make more sense than "making sell decisions based on the difference between price and value?" "In summary, I think buy and hold makes sense but buy and trade is a necessary evil..." Funny that you refer to a decision other than "hold no matter what" as "trading." Again, is there some kind of virtue in "holding no matter what" that I'm missing here?

I don't think you understand the question I posed to JackRiver. Read his theoretical example and my response question closely. He owns the right to 50% of a future stream of cash flows. I've offered to buy it for 60% of that future stream of cash flows. My question is very simple: would he agree to sell it to me or not? (And why or why not?) This question has nothing to do with selling something for X% more than the purchase price, it has to do with selling something for more than the value of it's future cash flows (without regard to one's cost basis).

To tie this post in with the previous thread in which you suggest one should never sell an excellent investment, I offer this simple question: Let's say you, JackRiver, own this right to 50% of the young man's earnings per year for life and I come to you and offer to buy it from you for 60% of the young man's earnings per year for life. Would you sell it to me?

"Fisher would never sell a stock for the reasons described above. He wasn't a trader. He bought companies with unique growth prospects, and held them for a very long time--50 years in the case of MOT. About the in and out trading described above, he said "it became increasingly apparent to me how silly these activities were." With taxes in some states getting up to over 40%, you have to assume some "mad skillz" in trading to overcome the tax penalty. Fisher gave three reasons to sell stock in a great company: 1)when you make a mistake in your original purchase and things are not as you believed 2)when a company no longer qualifies under the 15 points Fisher used to originally evaluate a company 3)when a more attractive investment arises As he says, "If the job has been correctly done when a common stock is purchased, the time to sell it is---almost never." Trading is trading, investing is something else altogether." Maybe I'm making inappropriate inferences, but it sounds like some posters here espouse comparing price and value when making purchase decisions but then ignoring price and value relationships at all times after the purchase has been made. I'm not sure I follow the logic in that method of operation. Investing is, at it's most basic level, about getting more in value than you pay in price. It would follow that this goal should apply not just to purchases but also to sales. Just as with purchases, sometimes you can receive more in value by selling a security than you in essence "pay" by continuing to hold it. And I take serious exception to the theory that holding securities a long time, in and of itself, makes one a "true investor." If the market price of a security reaches your estimate of its intrinsic value in a week from the date of purchase rather than in five years, why not capture that full intrinsic value today and redeploy your capital to other securities where price and value disparities exist. To me, holding fully priced securities with no price/value disparity and, therefore, no margin of safety does not make one a "true investor." Just to be clear, I'm not suggesting that investors should frequently buy and sell to capture small price changes. I'm simply saying that ignoring all price/value relationships after the date of purchase is not a logical investing method. And neither is continuing to hold a security just because its price met your value estimate "too quickly."

The last three paragraphs of this news coverage of the matter might induce vomitting: http://www.washingtonpost.com/wp-dyn/content/article/2009/03/18/AR2009031803459.html "The SEC's enforcement division disagreed with most of the report's findings. "There is hardly unanimity in the investment community or financial media on either the prevalence, or the dangers of, 'naked' short selling," it wrote. The division added, "The people closest to the trading, with the deepest understanding of and access to the data, did not see and refer any of the large-scale, damaging 'naked' short sale abuse." Allow me to translate: "We asked the people who were naked shorting stocks whether this was a problem and they insisted that it was not, so we don't see the problem."

Let me get this straight. This guy has written three books since retiring (and by the ripe old age of 34). Most would reasonably describe his occupation, therefore, as an active, self-employed professional author. Yet the very hook he uses to promote himself and sell his books is that he is supposedly "retired" at the age of 34. Doesn't sound like he's retired to me. It sounds like he's come up with a very ironic basis for selling books - retiring young when in fact he hasn't.

I'd have to disagree with that. Apathy mean the absence of interest. I don't think absence of interest accurately describes what is going on right now. People are plenty interested - heck, it's all people are talking about; they are just afraid that things won't get better anytime soon. Capitulation means giving up. In war, capitulation means surrendering or giving up the battle. In the stock market, capitulation means giving up 'hope.'

Speaking of giving up all hope, I am reading more and more quotes like these in recent days: http://www.nytimes.com/2009/03/06/business/economy/06shares.html?_r=1&ref=business "with no end in sight to the downward spiral" "With so much uncertainty, investors are parachuting out of companies like banks, retailers and utilities, and abandoning stock markets everywhere" "It’s just a continuing self-destructive market...Everyone is just selling" "We’re collapsing in on ourselves...Nobody wants to be invested, that’s the problem. I don’t believe we’re at the bottom yet." “Ninety-nine percent of the people I talk to are pessimistic...Everyone is sitting back and waiting for one more big implosion.” All of this was from just one article. And the other day I heard the talking heads on CNBC saying that long-term investing is dead and doesn't work anymore. I really think we're close to the point where most people have given up all hope.

Here is the best definition I've come across: "If people are calling the bottom, it isn’t a bottom. Capitulation means giving up all hope."

From the "article": "...there is obviously something going badly wrong since Buffett's Berkshire Hathaway (BRK.A) is down over 20% in 2009." Ah, letting the market guide you. That's what I call the tail wagging the dog.

June 19, 2006: FFH stocks sells for $88 February 20, 2009: FFH earns $80/share. Amazing.

From the article: "Fairfax wants Bill Holland to testify in connection with its bitter lawsuit..." Is the lawsuit bitter? Maybe, maybe not. But what difference does it make and why do reporters feel the need to editorialize in their news articles? Why not just say "in connection with its lawsuit"? Maybe I'm being oversensitive, but this kind of stuff bothers me.

"The global credit crunch has caused some of the firms that typically compete with Berkshire for deals to pare back on buying corporate debt and equity. That’s allowed Berkshire to command atypical returns from companies that need Berkshire’s capital or want to reassure shareholders with an endorsement from an investor of Buffett’s renown." Now there is an intangible asset you won't find recorded on Berkshire's balance sheet. Something to think about for those who try to value Berkshire shares based on book value.

Here is Henry Blodget's take on the news: http://www.businessinsider.com/chanos-sac-snared-in-wall-street-research-scandal-2009-2#comments His comments and the comments from readers at the bottom are kind of interesting. Sounds like a lot of folks think insider trading and market manipulation is no big deal.

From today's WSJ coverage: "Trading records obtained by Fairfax through discovery in the lawsuit show that Kynikos put on a $5 million "short" position, or a bet against Fairfax shares, in the month after Mr. Chanos learned of Mr. Gwynn's report, including $2.5 million the day before the report came out, a Fairfax attorney, Michael Bowe, said during a September court hearing." That pretty much says it all, doesn't it? Seems like it should be a pretty simple criminal case for some young government attorney to earn a notch on his belt with.