Lethargy bordering on sloth - the psychology of holding for the long term

[Andy Dufresne]

I would like to begin a discussion about the psychological demands required to hold positions for a long period of time and how to gain competence in following this difficult practice. As WEB wrote to the shareholders of BRK in his 1990 letter:

 

"Lethargy bordering on sloth remains the cornerstone of our investment style"

 

While I admire and rationally believe in Warren and Charlie's style of investing, I will begin by freely admitting that the tumult of the market has a siren-like effect on me - one that I struggle to defeat daily. In my not-too-scientific observation, many others struggle quietly and desperately and I would greatly appreciate the wisdom of more experienced Board members in helping us more impetuous souls on our journey to slothfulness  8)

 

Personally I am trying to understand both my impulses to do rash things and the situations that create these failures. I understand that some of these invariably come from my previous high-paced life experiences and that I need to set up both better habits (e.g. checklists, a separate room without electronic devices a la Guy Spier) and some external controls to improve my decision making.

 

If anyone else has anything to add in terms of questions, thoughts or reflections, I would be very happy to begin a vigorous discussion!

 

Many thanks in advance to all!

 

[randomep]

Great topic.

 

First off I want to digress about value investing. I read somewhere that many people have heard of value investing, but the observation is that few can apply it well to make money. So question arises, why? Well my theory has been that we just aren't patient. i rarely hear people mention holding stocks for years, let alone decades. Maybe that is also a function of age of people I observe. But the article says the biggest reason is that people just cannot act different from the crowd. Well I have no problem with that aspect. Many people have said I am weird. So I am used to being a black sheep. But I have more problem with being patient.

 

I have tried various way to cope with market gyrations and hold for the long term.

 

1. "Enjoy Pain", that's my favourite motto. It means to me that when things are bad, know that is a good thing, it is flushing out the other weak players in the market. It is an inevitable part of investing. Of course that has its limits, you must know when you've made a huge mistake and get out (like OiBr recently).

 

2. Be active. I update my portfolio in a spreadsheet. That means I have to update 20-30 numbers everyday. And it looks like I am doing something to make my portfolio go up, when the market is rising.  When I do trade I trade in small amounts, over several days. When I want to buy a block, I buy small bit at a time, so I am a more active trader for the same amount of stock I want to trade.

 

3. Have a job. I tried not working for a while and focusing on my investments. It was more than I could handle. I cannot handle having my working life be stocks, too stressful and too boring.

 

that's my main coping techniques.....

[KCLarkin]

 

"Lethargy bordering on sloth remains the cornerstone of our investment style"

 

 

1. You need to be invested in high quality companies that you KNOW will be worth more in 10 years than they are today. If you are investing in cyclical plays, asset plays, turnarounds, leveraged companies, or deep value, then the Sloth Strategy doesn't work. If you don't double down when the stock falls by 50%, you are probably investing in the wrong companies (for this strategy).

2. You need the right mentality. Generally, you want the stock PRICE to go down while the business VALUE goes up. You should be worried when prices go up and ecstatic when prices go down. If you aren't, then you will have a difficult time as a value investor. One mental trick is to track your portfolio earnings rather than prices. Look at Earnings Yield rather than P/E. Look at earnings charts (fast graphs or valueline) rather than price charts (google or yahoo).

3. You need a portfolio you can sleep with (e.g. no leverage, sufficient diversification, high quality, cash cushion). Keep some dry powder so you can take advantage of opportunities.

4. Focus on business fundamentals, not macro BS or technical analysis. Almost everything on CNBC or on the web is macro noise that is a waste of time and will detract from your performance. As a full-time investor, one strategy I use is to spend the mornings reading annual reports, etc. Once I check in on the markets at 11am or 12pm, I don't feel as much urgency to act.

5. You need to be willing to trade-off some "performance" to get the benefits of the sloth strategy. Remember WEB holding onto KO in the late 90s. This is often an imaginary tradeoff though. Most people would have better performance if they stopped trying to hit homeruns. There is ample research that shows that the more active you are, the worse your returns.

 

Once you've mastered the above, then stop monitoring prices. Try checking prices quarterly or annually. Set some price alerts so you can monitor buying and selling opportunities. With most of my portfolio, I'm almost there. For example, with WFC and BRK, I don't care what the price is day-to-day. I've owned both since 2009 and have no intention of selling either.

 

If you really want action, set aside some play money. Put the bulk of your portfolio in sloth stocks. Use a small amount (say 5%), as your mad money.

 

Just make sure you keep an eye on the fundamentals of your core holdings. You will need to act if your moat is breached. You may want to act if management starts making bad acquisitions or decisions.

 

 

 

 

 

 

[merkhet]

Get a hobby. When you feel antsy, focus on the hobby.

[Fat Pitch]

It’s pretty easy spotting great companies; the trick is to wait for the right price. I agree it’s almost impossible to be patient and ignore the markets’ temptations to be active so why not channel this urge in some other way?

 

The best way I found dealing with the markets is to simply play a game that simulates markets. Some of the tycoon type games are great for satisfying that urge to trade/make money/do stuff without harming your real assets. These games also teaches you something about compounding.

 

[Uccmal]

Smoke some ganja....

 

Seriously,

 

As KClarkin said, this strategy only works with good companies with something of a long term moat.  The Buffett, pre Sees Candy, bought and sold as things came to value. 

 

These days I really only trade my Leap positions.  The common stocks I have are generally extreme long term holds, barring bizarre events.  There are only a few that qualify for sloth status, in the public markets. 

[LC]

This is my favorite of WB's lines. It just resonates with me, maybe because I am lazy? :)

 

I agree with the poster who said you have to really enjoy the short term pain. It's not the worst thing in the world for your stock price to go down. It's important to remember that. Even temporary business fundamentals (see the FHCO thread). Be a real business owner, not a guy who has read all the value investing books and wants to trade stocks (albeit at a slower rate than 'traders').

 

What also helps me a lot is to do reading that is totally opposite of most of the reading done to invest. We read 10ks, business news, trade reports and statistics, words from 'famous' investors...that stuff can fry you out after a while! I try to, at the same time, try to read stuff completely opposite of this. I just finished the Nightwatch series, a fantasy epic set in Russia. Great series, thought provoking, easy and fun to read. Totally opposite of a 10k. But it keeps my mind from being burnt out. It makes it easier to be lethargic with respect to my portfolio because it balances me out. So that practice helps a ton.

 

And also, is it so bad to be wrong? A lot of times people trade out of a position due to fear. Well, what's the worst that happens? As long as you won't go hungry and live on the street, what are you really worried about? Ok ok I guess that applied to me moreso than the older members here with families, kids, OPM, etc. but I think the fundamental truth that it's OK not to fear being wrong is a good thing. Just my 2 cents.

[valueinvesting101]

I agree with KCLarkin strategy.

 

Best to way to insulate from market fluctuations is to understand business better. You would not worry about your kid too much if he is sick and cannot study/play for couple of days. What matters is long run habits, aptitude and attitude. I think same goes with the stocks/businesses.

 

Try thinking about challenges/opportunity business faces. Try to read up about competition and new entrant. When focusing on bank, try comparing what advantage/disadvantage other companies have such as Paypal, quicken loans have or can exploit. This will help you understand potential opportunity and risk.

 

Also expanding one's circle of competence is always good idea than focusing on market fluctuations. Learning about different businesses is very interesting pastime anyways. Reading snowball, I was amaze at how many different ways WEB thought about making money before turning into stocks. He was very entrepreneurial before turning into sloth. I think turning into sloth directly can be dangerous as you will miss out on learning from running or analyzing actual business. He had to keep learning by buying failing retail business or candy business to gain new insights.

 

'Empty mind is devil's workshop'. Keeping oneself occupied with different or related hobbies is good idea. I usually find reading about legends in the different walks of life makes me focus more on substance rather than just few ticks of stock prices.

 

 

 

 

 

 

[LongHaul]

Wonderful post Andy.  I appreciate your honesty.

 

Definitions of patience:

1.  Steadfast despite opposition, difficulty or adversity.

2.  Able or willing to bear.

3.  Bearing pains or trials calmly or without complaint.

4.  An ability or willingness to bear provocation, annoyance, misfortune, or pain without complaint, loss of temper, irritation, or the like.

 

I think it is instinctual within us humans to be impatient.  I feel the pull of impulses and impatience.  Right now I think a lot of stocks are overvalued and I am not willing to buy at these prices.  I find it difficult to wait it out.  In early 09 it was enduring and willing to be patient for stocks to be fairly valued.  I remind myself that 2+2=4 and try to look out at the expected return from holding a company for the next 3 years.  The short term quote doesn't matter as long as I am right about the value.

Also, I will review the fundamentals of the company when I start doubting myself.  If the company's value is still there I will just tough it out.  I think Graham said that the ultimate virtue is courage in investing when you feel alone.

 

Personally I have made a book to myself.  It is not much, but it helps me think long-term and be patient.  It has my thoughts at various times when I was impatient and the consequences of reaching and being impatient (06-07), quotes on patience and other information.  We are all human and get pulled daily by our emotions in a tug of war so I think we need these reminders for clarity.  At least I do.

 

Marcus Aurelius wrote a book to himself called Meditations.  He was constantly pulled away from his stoic philosophy by

humans who were difficult, greedy, bad, etc.  The book helped him deal with everyday life.  I would highly recommend the book and Stoic philosophy.  The books are not a "read once" and never return type.  I read them more for grounding.

 

Some old quotes on patience

 

Nietzche:  "Passion will not wait."  "Being able to wait is so hard."

 

"All men's miseries derive from not being able to sit in a quiet room alone."

Blaise Pascal

 

 

 

 

[Mikenhe]

Learn the art of Procrastination!

 

 

I should have posted that earlier....

[oddballstocks]

Yes, buy & hold has worked for many.  Go to any senior citizens event and find those living off dividends, they will vouch for this strategy.  No genius is required as other posters have said.

 

Purchase shares of large well known name brands that pay dividends.  Reinvest your dividends and go do something else.  It also helps if there's a bull market of the century like we had from the early 80s.

 

Most large companies grow at the rate of GDP growth plus inflation.  So maybe 7% a year or so, if you hold long enough and reinvest your dividends that will result in considerable wealth.

[Andy Dufresne]

Thank you all for your thoughts!

 

I tried to procrastinate in answering all of you .... he he ... but if I try to quickly synthesize some of the major themes, they would be:

 

1. Get a life :)  ... agreed, but a balance must be struck between involvement in the practice of investing, especially when you are starting out and trying to build up your database.

 

Uccmal - thanks for the dopey suggestion, but I'm not a smoker of anything :)

 

LC - fantasy is not my thing to read, but I am currently visiting Russia :) I warmly recommend Bulgakov's (The) Master & Margarita if you want some truly outstanding fantasy! Vrubel's paintings are also good!

 

2. Think like a business owner / get to know your companies intimately ...  I am well aware of this - I am a FCF yield guy rather than an E/P guy; for me the crux of it presently is finding honest & able managements, that will communicate with shareholders; with respect to moat & competitive positioning - that is definitely the hardest part and I think that WEB & CM tend to simplify it too much by saying "oh, we need to visualize what the company will do in 5 to 10 years ..."

 

3. Buy & hold should work going forward, but nobody really knows / Trading generally leads to lower returns ... In theory this should give me comfort, but in practice this has no effect on me whatsoever; I tend to disagree with any widely held belief and I am still at the stage where experimenting is possible and likely of some value - I have no clue what will happen in the future but I am skeptical of any statistical analyses, whatever they might suggest  :o

 

More feedback and suggestions are appreciated!

[KCLarkin]

I think that WEB & CM tend to simplify it too much by saying "oh, we need to visualize what the company will do in 5 to 10 years ..."

 

TBH, I don't think you are ready to invest like a sloth. It really is that simple (but not easy). Buffett's top four holdings are all 100 year old companies.  To pull off this strategy, you need to be boring and have low expectations. It's okay to spice things up but you need to be honest with yourself. It's relatively simple to build a sloth portfolio that can return 8-12%. If you are expecting 15-20%, the sloth portfolio won't work for you.

 

I am skeptical of any statistical analyses, whatever they might suggest

 

It is a mathematical fact that, in aggregate, traders will underperform the "market". Trading costs and capital gains taxes ensure this result.

 

Buffett has a wonderful essay on this:

http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fortune/

 

And remember, this only works with great companies:

 

"If the business earns 6% o­n capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 18% o­n capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result." - Charlie Munger at USC Business School in 1994

 

 

[coc]

I think you're worrying about some of the wrong things. Don't concern yourself with what the statistical analysis says, or "buy and hold," or "trading strategies,"or "growth," or "value," or any of that nonsense that is used by the industry to sell its services and sound important in newsletters.

 

Would you be thinking about all that if you were investing in businesses that weren't traded all day long? I really doubt it. You're letting the liquidity of the market determine your thought process. But you don't have to. Here's what you'd be thinking about instead:

 

A. Am investing in a business I understand? You, personally. Not someone else. By understand, I mean do you have a general sense of the kind of money it's going to be earning five and ten years from now, and as importantly, why? Among the thousands of publicly traded companies, this is usually impossible.

 

But tell me -- is it hard for you to grasp that the Union Pacific railroad will probably be moving more stuff, perhaps at a slightly higher price per ton mile, five years from now? Is it hard to understand that Coke will likely be moving more drinks through its system five years from now, at a same or greater price per serving? Can you explain the forces behind this? Sure you can.

 

Now I know everyone wants investments are have a little more va-voom than those. That's fine. But the mental model is the same whether you buy Coke or a Korean steel manufacturer -- the stock will eventually reflect the long term real earning power of the business.  If you don't have any sense of it, ask yourself, do I really know what i'm doing? Would I do this if I was buying into a private partnership that traded once every three months?

 

B. What price am I paying, relative to these economics I feel I can understand? (See A.) Again, this is super simple. Now that I've established that this is a thing I understand, what am I paying? If I'm paying $10 billion, what sort of real earnings am I getting and when? Maybe if I'm going to get $700 million this year, and I feel that is going to grow at a nice rate due to the underlying nature of the business, that's pretty good -- I might earn a good return.

 

Let's do UNP. I'd have to lay out $92 billion today to buy it. They will probably have sales of about $23.5 billion this year at at 35% pre-tax profit margin, and I'll get something like $5 billion after tax. Let's say they reinvest $1.5 billion of that and pay me back $3.5 billion. That's about a 4% yield today, and if they can earn 20% on the reinvested capital, next year my $5 billion is $5.3 billion. So next year they pay me $3.7 billion. And so on. Maybe that's too low, maybe that's enough...that's up to you, but that's what you're thinking about.

 

Now I know this sounds like remedial security analysis but I will say this...I see very few people doing it any more. They're mostly doing something else. I see EBITDA, sum of the parts asset analysis, and all these things, and it makes my eyes glaze over. Maybe that sounds harsh, but it's reality. What is the business going to earn for you?? If you can tell me that, I'll tell you if it's any good as an investment. If you can't tell me that, why do you think you know what it's worth?

 

Now, let's say my capital is wisely used in Union Pacific Corp, given my alternative current and future uses of that capital, so I buy it. What do I do then? Well -- what would you do if 99% of its liquidity went away? Let's say you could only trade it once in a while, and then on low volume.

 

What you'd do is monitor the progress of your investment, the same way you'd do it if Union Pacific was private. What were their carloadings? What did they earn on them? How do expenses look? What are they spending new money on? What are their competitors doing? You'd read the statements, read the press, talk to other smart people about railroads, etc. Maybe the price would go down 30% next year and you decide to buy an even bigger piece of the Union Pacific for yourself because the business is still perfectly good.

 

And then as that process goes along, maybe some day the market comes along and appraises the company in a different way. Maybe five years from now, the valuation is $220 billion, they have 15% less shares outstanding, and Union Pacific is only going to pay you $4 billion that year. And as you look around, you see that some other company you really understand is going to pay you 10% on your money, and grow that nicely over time. So you sell the stock and reinvest in the better opportunity.

 

And so on, ad nauseum. How do we categorize what I've described above? Growth investing? Value investing? Buy and hold? Buy and sell? Really though, who cares? I'm describing basic, bread-and-butter investing. There will never be some day when this "stops working" as long as we have a functioning capitalist system.

 

To those who say you can't earn high returns doing this, I beg to differ. What if you bought Union Pacific 10 years ago and just sat there? Well I'll tell ya -- about 23% per annum. Just letting the financial statements roll through the door. And this is not some obscure, hard to grasp situation. How many of us have done better trading all kinds of companies with iffy futures? How "risky" would it have been to hold a block of Union Pacific stock? And I could name lots of others as straight-forward as the railroad. (How about Mastercard, which we all use? How about Disney when they promoted Bob Iger, a disciple of Dan Burke & Tom Murphy, and an obvious talent? How about Autozone? Everyone reading this can put together a competent analysis of those companies with a little thinking.)

 

I'm not saying these are today's opportunities, either. They may or may not be. The world changes and prices fluctate, so the opportunity set today isn't what it was in 2004, nor will it be in 2024. But my point is, the basic stuff works. The catechism works. I don't think it needs to be turned into rocket science.

 

I hope all of this long-windedness helps you, and maybe some others, re-focus on simple, and sound, investing. Focus on what's important and the day-to-day will get a lot easier. And when you find a situation where the action (buy) is clear, don't be timid. And if it isn't, just don't do anything. This isn't the only way to invest, but it works.

[Andy Dufresne]

I think that WEB & CM tend to simplify it too much by saying "oh, we need to visualize what the company will do in 5 to 10 years ..."

 

TBH, I don't think you are ready to invest like a sloth. It really is that simple (but not easy). Buffett's top four holdings are all 100 year old companies.  To pull off this strategy, you need to be boring and have low expectations. It's okay to spice things up but you need to be honest with yourself. It's relatively simple to build a sloth portfolio that can return 8-12%. If you are expecting 15-20%, the sloth portfolio won't work for you.

 

I am skeptical of any statistical analyses, whatever they might suggest

 

It is a mathematical fact that, in aggregate, traders will underperform the "market". Trading costs and capital gains taxes ensure this result.

 

Buffett has a wonderful essay on this:

http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fortune/

 

And remember, this only works with great companies:

 

"If the business earns 6% o­n capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 18% o­n capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result." - Charlie Munger at USC Business School in 1994

 

KC - thanks for the informative article and the CM quote. Even better for doubting my ability to be slothful - WEB and others have said many times that people either "get" value investing or don't - I wonder if the same might hold true for the slothful investment style ... from the informal comments in this thread I would assume that most members would think it is a learnable trait.

[SharperDingaan]

Sloth just sucks.

 

Get involved in a production start-up - & it'll quickly take care of the problem ;)

 

SD

[KCLarkin]

"WEB and others have said many times that people either "get" value investing or don't - I wonder if the same might hold true for the slothful investment style ... from the informal comments in this thread I would assume that most members would think it is a learnable trait."

 

It's certainly learnable. Motivation is the key. My tax situation makes me highly motivated to defer capital gains. If you are working with a small portfolio or in a tax-free account, you will have less motivation to hold for the long term.

 

Sloth investing isn't the "best" way to invest. In fact, it's quite rare. Deep value works. Momentum works. Magic Formula should work. Indexing works. DFA/RAFI seem to work. Small cap investing works. Dividend growth investing works. GARP works.

 

You just need to find an approach that works for you. It seems like you are still learning and experimenting, which is why I suggested you aren't ready for sloth investing (yet).

 

[oddballstocks]

Sloth just sucks.

 

Get involved in a production start-up - & it'll quickly take care of the problem ;)

 

SD

 

+100  Starting a company has been able to fill up all of my extra time and then some.  Checking stock quotes too often, fixed.  Not worrying about day to day developments, fixed.

[petec]

I divide my investments into two:

1) 5-7 year winners, businesses that are undervalued now and have good prospects but that I don't want to own for the very long term.

2) Businesses that I want to own for the very long term.  These have been around for decades, are in industries that change slowly, have exceptional financial characteristics, and usually have a particular culture.

 

With the first set, I try to be very rational about value.  With the second set, I actively try to build an emotional bond.  I try to fall in love with these stocks.  I read company histories and note down anecdotes, and if I had space I would keep annual reports because I know I will find it difficult to sell stocks where I have a row of 20 annuals on the shelf.  This emotional bond may seem crazy but it stops me from wanting to sell because of macro or the market's siren call.  I think I would still be able to sell, or at least reduce, if these stocks themselves were significantly overvalued, but...

 

...the third part of my strategy is to know that I have ways of making good money off the bottom if there is a selloff, which makes me less likely to try to call tops and raise cash.  I always have 10% cash or thereabouts, and I tell myself I will buy options etc. at the bottom to lever my returns.  That stops me feeling I need 80% cash at the 'top' (which of course never turns out to be the top!).

 

I am sure this is not very rational but it seems to work for me!

 

Pete

[LongHaul]

Great post COC

 

I liked this part the best:

 

"I hope all of this long-windedness helps you, and maybe some others, re-focus on simple, and sound, investing. Focus on what's important and the day-to-day will get a lot easier. And when you find a situation where the action (buy) is clear, don't be timid. And if it isn't, just don't do anything. This isn't the only way to invest, but it works."

 

And yes EBITDA is total BS.

[Libs]

I've owned BRK for 15 years, and it's been >50% of my holdings most of that time.

 

What has helped me enormously - since it feels like watching grass grow sometimes - is to manually write in each quarter's results in a spreadsheet.

 

It's starting to look like papyrus, it's so old...but I love it.

 

In fact, I went back and filled in numbers going back to 1990!

 

I do the same thing with WFC.

 

I'm not sure why this works, but it prevents me from making an emotional, quick trading decision. When you see that operating income has gone from $1.8 B in 2000 to $15 B in 2013, it's harder to sell BRK to buy that chemical mfg. turn-around.

 

One other thing...concentrating  $$ into the positions in which it's very hard to shake your conviction. Sounds obvious, but this can get away from you.

 

I search long and hard for opposing view points. (This is another way to 'fill up time.'). When it's real hard to kill your idea, that's a very big deal.

 

When you read something on Seeking Alpha that makes you sweat, you probably need to re-think what you're doing with that stock.

 

COC: A++ man!

 

[rjstc]

I think you're worrying about some of the wrong things. Don't concern yourself with what the statistical analysis says, or "buy and hold," or "trading strategies,"or "growth," or "value," or any of that nonsense that is used by the industry to sell its services and sound important in newsletters.

 

Would you be thinking about all that if you were investing in businesses that weren't traded all day long? I really doubt it. You're letting the liquidity of the market determine your thought process. But you don't have to. Here's what you'd be thinking about instead:

 

A. Am investing in a business I understand? You, personally. Not someone else. By understand, I mean do you have a general sense of the kind of money it's going to be earning five and ten years from now, and as importantly, why? Among the thousands of publicly traded companies, this is usually impossible.

 

But tell me -- is it hard for you to grasp that the Union Pacific railroad will probably be moving more stuff, perhaps at a slightly higher price per ton mile, five years from now? Is it hard to understand that Coke will likely be moving more drinks through its system five years from now, at a same or greater price per serving? Can you explain the forces behind this? Sure you can.

 

Now I know everyone wants investments are have a little more va-voom than those. That's fine. But the mental model is the same whether you buy Coke or a Korean steel manufacturer -- the stock will eventually reflect the long term real earning power of the business.  If you don't have any sense of it, ask yourself, do I really know what i'm doing? Would I do this if I was buying into a private partnership that traded once every three months?

 

B. What price am I paying, relative to these economics I feel I can understand? (See A.) Again, this is super simple. Now that I've established that this is a thing I understand, what am I paying? If I'm paying $10 billion, what sort of real earnings am I getting and when? Maybe if I'm going to get $700 million this year, and I feel that is going to grow at a nice rate due to the underlying nature of the business, that's pretty good -- I might earn a good return.

 

Let's do UNP. I'd have to lay out $92 billion today to buy it. They will probably have sales of about $23.5 billion this year at at 35% pre-tax profit margin, and I'll get something like $5 billion after tax. Let's say they reinvest $1.5 billion of that and pay me back $3.5 billion. That's about a 4% yield today, and if they can earn 20% on the reinvested capital, next year my $5 billion is $5.3 billion. So next year they pay me $3.7 billion. And so on. Maybe that's too low, maybe that's enough...that's up to you, but that's what you're thinking about.

 

Now I know this sounds like remedial security analysis but I will say this...I see very few people doing it any more. They're mostly doing something else. I see EBITDA, sum of the parts asset analysis, and all these things, and it makes my eyes glaze over. Maybe that sounds harsh, but it's reality. What is the business going to earn for you?? If you can tell me that, I'll tell you if it's any good as an investment. If you can't tell me that, why do you think you know what it's worth?

 

Now, let's say my capital is wisely used in Union Pacific Corp, given my alternative current and future uses of that capital, so I buy it. What do I do then? Well -- what would you do if 99% of its liquidity went away? Let's say you could only trade it once in a while, and then on low volume.

 

What you'd do is monitor the progress of your investment, the same way you'd do it if Union Pacific was private. What were their carloadings? What did they earn on them? How do expenses look? What are they spending new money on? What are their competitors doing? You'd read the statements, read the press, talk to other smart people about railroads, etc. Maybe the price would go down 30% next year and you decide to buy an even bigger piece of the Union Pacific for yourself because the business is still perfectly good.

 

And then as that process goes along, maybe some day the market comes along and appraises the company in a different way. Maybe five years from now, the valuation is $220 billion, they have 15% less shares outstanding, and Union Pacific is only going to pay you $4 billion that year. And as you look around, you see that some other company you really understand is going to pay you 10% on your money, and grow that nicely over time. So you sell the stock and reinvest in the better opportunity.

 

And so on, ad nauseum. How do we categorize what I've described above? Growth investing? Value investing? Buy and hold? Buy and sell? Really though, who cares? I'm describing basic, bread-and-butter investing. There will never be some day when this "stops working" as long as we have a functioning capitalist system.

 

To those who say you can't earn high returns doing this, I beg to differ. What if you bought Union Pacific 10 years ago and just sat there? Well I'll tell ya -- about 23% per annum. Just letting the financial statements roll through the door. And this is not some obscure, hard to grasp situation. How many of us have done better trading all kinds of companies with iffy futures? How "risky" would it have been to hold a block of Union Pacific stock? And I could name lots of others as straight-forward as the railroad. (How about Mastercard, which we all use? How about Disney when they promoted Bob Iger, a disciple of Dan Burke & Tom Murphy, and an obvious talent? How about Autozone? Everyone reading this can put together a competent analysis of those companies with a little thinking.)

 

I'm not saying these are today's opportunities, either. They may or may not be. The world changes and prices fluctate, so the opportunity set today isn't what it was in 2004, nor will it be in 2024. But my point is, the basic stuff works. The catechism works. I don't think it needs to be turned into rocket science.

 

I hope all of this long-windedness helps you, and maybe some others, re-focus on simple, and sound, investing. Focus on what's important and the day-to-day will get a lot easier. And when you find a situation where the action (buy) is clear, don't be timid. And if it isn't, just don't do anything. This isn't the only way to invest, but it works.

 

Coc. Very good. Rational.

[Kraven]

"WEB and others have said many times that people either "get" value investing or don't - I wonder if the same might hold true for the slothful investment style ... from the informal comments in this thread I would assume that most members would think it is a learnable trait."

 

It's certainly learnable. Motivation is the key. My tax situation makes me highly motivated to defer capital gains. If you are working with a small portfolio or in a tax-free account, you will have less motivation to hold for the long term.

 

Sloth investing isn't the "best" way to invest. In fact, it's quite rare. Deep value works. Momentum works. Magic Formula should work. Indexing works. DFA/RAFI seem to work. Small cap investing works. Dividend growth investing works. GARP works.

 

You just need to find an approach that works for you. It seems like you are still learning and experimenting, which is why I suggested you aren't ready for sloth investing (yet).

 

Yes, exactly.  There is no right way to invest.  Knowing thyself is the key point.  One has to do what works for them and what feels comfortable.  Investing isn't some ivory tower endeavor.  It's not purity incarnate.  It's a means to an end.  It's about making money.  If one can make money because they have a system for picking lottery ticket winners, then that's what they should do.  If one can invest by looking at squiggly lines, then they'd be foolish to do something else that didn't work as well for them.

[bookie71]

One thing that has helped me is that years ago I set up a small account at another brokerage and do my experimenting there.  I mentally wrote the account off when I set it up.  I have found out that options just don't work for me, margin is good and bad or as someone said, "leverage works both ways".  I do all my experimenting in this account and it has saved me tons over the years and satisfies my need for action.

I did notice a couple of years ago that the account gets more and more conservative as I get older.

[coc]

I'm glad a few of you enjoyed my message. I also think some of the other recommendations here are excellent. For example, the recommendation to get involved with a real private business, whether starting your own or investing in one. I've never met anyone who's done that and ended up saying to themselves "Man am I a worse investor now!" It's a no brainer if you have the opportunity to do so.

 

I also like the recommendations by "Libs" and by "petec" to help develop a historical sense of any company you're investing in, to the best of your ability. I think that puts you in the mindframe of a business person, rather than a stock trader. I love looking back and seeing what Fastenal or Danaher or some other admirable company has achieved. Are they usually mispriced? No. The market is pretty good. Fastenal deserves to trade at 30x earnings. But you'd be surprised how often clearly superior businesses trade at oddly low prices. (Was Berkshire rationally priced at $70 (B shares) a few years ago?) Markets do weird things. And you don't need that many in a lifetime if you have the will to seize them.

 

To answer the inevitable retort that there are great stock traders, asset players, arbitraguers, formula-users etc. out there, you're absolutely right. But it's been my experience that those are few and far between, and some of the ones that are successful don't correctly diagnose their own success. So there's survivorship bias. And many of the good ones have eventually run into lots of trouble. We're talking very, very smart, able, people.

 

Let me give a brief example. I have heard that "momentum works." I assume this refers to studies that have proven some statisically significant momentum effects, and evidence of a few traders who have pulled it off. But we're investing through the windshield, not the rearview mirror. Has anyone studied to what degree momentum still "works" now that hordes of 170 IQ engineers from Cal Tech have designed computer algorithims to trade billions of dollars on that principle? Are we sure it's going to hold up? What do I do when my momentum stocks go down 50%? (You can apply that question to all kinds of approaches, by the way.) 

 

So I think, above all, any investing strategy has to start with a degree of intellectual honesty and honest self-appraisal. There's a reason Charlie Munger quotes the physicist Feynman all the time (don't fool yourself) -- it's extremely important.

 

And I think success in the "bread and butter" sort of investing I've described is attainable by someone with average intellience and ability, a good mental disposition, and a reasonable head for business and accounting. If you choose a more esoteric path, I wish you luck. I don't begrudge anyone getting rich faster if they can do it soundly.