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How Long Do You Hold a Losing (On Paper) Investment?


AzCactus
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Hi All,

 

I am fully aware that a loss obviously is not a loss until it is realized.  That being said how long are you comfortable holding an investment that is getting trounced by the indexes?  One example that I know some people in this forum own is Biglari Holdings.  Per Google Finance since 12/31/2009 the company has returned about 12% total, while the S&P 500 is up 83%.  This is noteworthy because its about 5 years not one or two months.  A second example is Berkshire's investment in IBM.  I believe he bought (initiated) his stake in November of 2011 and the investment is probably down around 8-10% while the market is up about 64%.  Anyone have thoughts or insights?

 

Thanks,

David

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I'd argue:

 

a) you hold it for as long ass you are sure it is undervalued

 

b) you might want to sell it if you feel emotions creeping into your argument for (a)

 

c) you might want to add to it if your argument for (a) keeps getting stronger

 

d) you want to think very carefully about whether performance vs. the index matters to you.  I hold a number of stocks that I basically plan to hold forever because I think they will provide a return that will get me to where I want to be financially in the very long term.  Clearly I might be wrong but the performance of the index over a short term timeframe (and yes I do consider 5 years to be quite short) doesn't matter a huge amount to me.  (I'd also ask why the index has outperformed, e.g. I could argue that with margins at records and still rising, and with QE, the index performance of recent periods isn't driven by sustainable fundamentals and therefore is not a sensible benchmark for investments that were made based on sustainable fundamentals.)

 

Pete

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Hi Pete,

 

Thanks for the reply :)

If you do not consider five years a long time, I would ask what is the shortest time frame that you consider long?  If you look at Biglari as an example there performance is about 7100 basis points worse than the index, for them to make up that ground they are going to have to outperform the S&P 500 by 11.5% for the next five years just to be where the index is at.  Also, the reason I mention the index is because that is basically the opportunity cost to picking individual stocks.  I mean if someone buys VFINX and holds for an indefinite period of time they will outperform most managers. 

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Biglari may be a poor candidate for this mental exercise in that value has been distributed to shareholders in the form of deep in the money rights, which have benefited those who have exercised at the expense of those who have not. Per share value gets diluted by the rights offerings, but for those who exercise they are value neutral (if everyone exercises) and value creating (if some shareholders abstain). For the record, I don't own BH, but the share price doesn't tell the whole story.

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If you are buying good businesses (earnings are growing, ROE is strong and stable), then you can wait out the market. If you look at IBM, EPS is up substantially since 2011. Valuation has compressed so that means:

- risk is reduced

- potential reward has increased

- Dividend and Buyback yield has increased

 

I usually go one of two ways:

a) Sell aggressively for tax losses

b) Add to position as it drops

 

I have a mixed record with (a). I've had great success with (b).

 

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Hi Pete,

 

Thanks for the reply :)

If you do not consider five years a long time, I would ask what is the shortest time frame that you consider long?  If you look at Biglari as an example there performance is about 7100 basis points worse than the index, for them to make up that ground they are going to have to outperform the S&P 500 by 11.5% for the next five years just to be where the index is at.  Also, the reason I mention the index is because that is basically the opportunity cost to picking individual stocks.  I mean if someone buys VFINX and holds for an indefinite period of time they will outperform most managers.

 

I guess my answer wasn't complete actually.  I try to buy two types of investment: stocks that I don't particularly want to hold forever that are significantly undervalued, and stocks that I'd ideally like to hold forever that are priced to give me a compounded return above the market long run average (~7% over >100y).

 

For the first type of stock, I try to allow 5-7 years for the investment to pan out so long as my thesis stays intact.  Performance relative to the benchmark is irrelevant so long as I think I can double my money in 3 years or treble it in 5-7.

 

For the second type of stock, my holding period is basically infinite again so long as my thesis stays intact and so long as the stock does not move into clearly overvalued territory.  With these stocks, the index is also irrelevant because by definition it will give the same long run return as the market (it is the market!) and so if I got my purchase right, I'll beat the index over the really long term and the only reason to stress about a 5y time horizon is because other people got rich quicker than me, which I try very hard not to care about because it really messes with your psychology.

 

So basically, I try not to let the index come into my thinking.  I try to focus on my thesis and the valuation vs. my long term return requirements, and I don't see why the prices that other people pay for other stocks should affect my decisions.

 

I should say that I try to focus on dividend payers because that way I feel like I am getting a return even as the stock falls, and of course the yield rises as the stock falls.  I find that gives me more patience than I would otherwise have.

 

P

 

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I think it depends on your strategy.

 

If you're in quality stocks that are clearly creating value at an acceptable rate, hold it regardless of the lack of market action. Each day it builds value internally but stays flat, or down, in the stock is a day that your margin of safety increases and you're expected future returns increase.

 

If you're doing a basket approach with little knowledge of individuals names, then you need a disciplined rule to to remain consistent. Most choose 1-3 years.

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