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The Art of (Not) Selling - Chuck Akre


chrispy
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Nothing ground breaking but good food for thought

 

https://www.akrecapital.com/the-art-of-not-selling/

 

This is an interesting quote from this article. I can’t say I follow this advice. My buys and sells are mostly based on valuation with perhaps a short term focus on momentum (letting winners run). I also tend to sell if a stock goes up substantially without change in corroborating news or fundamentals. Sometimes, it pays, and sometimes I leave money on the table, especially in bull markets. When markets seesaw and volatility is high, the buying /selling works very well.

 

Also, if not selling based on fundamentals, what other guidelines is one using?

Valuation plays no role in our sell decisions, and neither do price targets.
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Nothing ground breaking but good food for thought

 

https://www.akrecapital.com/the-art-of-not-selling/

 

This is an interesting quote from this article. I can’t say I follow this advice. My buys and sells are mostly based on valuation with perhaps a short term focus on momentum (letting winners run). I also tend to sell if a stock goes up substantially without change in corroborating news or fundamentals. Sometimes, it pays, and sometimes I leave money on the table, especially in bull markets. When markets seesaw and volatility is high, the buying /selling works very well.

 

Also, if not selling based on fundamentals, what other guidelines is one using?

Valuation plays no role in our sell decisions, and neither do price targets.

 

Every single time I have sold a great business for valuation reasons I've regretted it. I think the alternative option is to hold great businesses as long as they're great.

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Nothing ground breaking but good food for thought

 

https://www.akrecapital.com/the-art-of-not-selling/

 

This is an interesting quote from this article. I can’t say I follow this advice. My buys and sells are mostly based on valuation with perhaps a short term focus on momentum (letting winners run). I also tend to sell if a stock goes up substantially without change in corroborating news or fundamentals. Sometimes, it pays, and sometimes I leave money on the table, especially in bull markets. When markets seesaw and volatility is high, the buying /selling works very well.

 

Also, if not selling based on fundamentals, what other guidelines is one using?

Valuation plays no role in our sell decisions, and neither do price targets.

 

Every single time I have sold a great business for valuation reasons I've regretted it. I think the alternative option is to hold great businesses as long as they're great.

 

I have seen both. To some extend, I was playing the 1999/2000 tech bubble and I really didn’t regret anything I sold back then. Many would have lost 90% back. Even with great companies like MSFT, which did. put out good numbers all along, the multiple regression caused substantial losses that took a decade to make up.

 

Current examples are a bunch or SAAS companies or even something like DIS.

 

 

While I agree thwt DIS has great assets, I do wonder if the stock surge of ~30% has overextended the stock. The streaming competition is going to be tough and DIS estimates thwt it will take a few years to just break even. Then the cash machine ESPN is becoming a wasting assets. So what we have is a stock that may not have any earnings growth for a couple of years, yet trades at ~27x earnings ($5.2 earnings estimate for 2020), which is far above it’s historical range. I‘d rather own FOX or CMCSA Right now at far lower valuations and that’s indeed where I swapped proceeds from DIS sales into.

 

This may turnout out to be a mistake, but I think it is a value approach and protects downside. I think a lot folks that talk about great business here have not really experience when the multiple compression bear raises its ugly head.

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Nothing ground breaking but good food for thought

 

https://www.akrecapital.com/the-art-of-not-selling/

 

This is an interesting quote from this article. I can’t say I follow this advice. My buys and sells are mostly based on valuation with perhaps a short term focus on momentum (letting winners run). I also tend to sell if a stock goes up substantially without change in corroborating news or fundamentals. Sometimes, it pays, and sometimes I leave money on the table, especially in bull markets. When markets seesaw and volatility is high, the buying /selling works very well.

 

Also, if not selling based on fundamentals, what other guidelines is one using?

Valuation plays no role in our sell decisions, and neither do price targets.

 

Every single time I have sold a great business for valuation reasons I've regretted it. I think the alternative option is to hold great businesses as long as they're great.

 

I have seen both. To some extend, I was playing the 1999/2000 tech bubble and I really didn’t regret anything I sold back then. Many would have lost 90% back. Even with great companies like MSFT, which did. put out good numbers all along, the multiple regression caused substantial losses that took a decade to make up.

 

Current examples are a bunch or SAAS companies or even something like DIS.

 

 

While I agree thwt DIS has great assets, I do wonder if the stock surge of ~30% has overextended the stock. The streaming competition is going to be tough and DIS estimates thwt it will take a few years to just break even. Then the cash machine ESPN is becoming a wasting assets. So what we have is a stock that may not have any earnings growth for a couple of years, yet trades at ~27x earnings ($5.2 earnings estimate for 2020), which is far above it’s historical range. I‘d rather own FOX or CMCSA Right now at far lower valuations and that’s indeed where I swapped proceeds from DIS sales into.

 

This may turnout out to be a mistake, but I think it is a value approach and protects downside. I think a lot folks that talk about great business here have not really experience when the multiple compression bear raises its ugly head.

 

Great points as always. There is some level where valuation becomes so egregious (==bubble) that it isn't reasonable for even an excellent business to earn it back. Microsoft in 2001 and maybe the SAAS companies now seem like examples.

 

I'm conflicted about DIS, which is a company I do own in this bucket. I swapped my DIS for FOX pre-merger but took shares in the merger to capture the spread. I think DIS is fundamentally a better business than either comcast or fox, but the valuations are certainly divergent. I also don't think 2020 is likely to have much for upside surprises, especially on the first half of the calendar year.

 

Whatever they get for Disney+ subs right away, there isn't really a big catalyst for new people until the fall of 2020. And the movie slate is way weaker in 2020. So I agree DIS is likely overvalued in the near term. I'm reluctant to sell, but have considered gregmal's thoughts from another thread about selling in the money covered calls with interest.

 

The other one I'm having a hard time with right now is COST - great business, but I wouldn't even consider buying at this price. Maybe I should sell, but I felt the same way at $215...

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I'm kinda mixed on this because I feel its(like everything) situation dependent. Spek is probably right though, a lot of the recent "fund manager wisdom" IMO stems from capitulation and is influenced by one of the greatest bull market stretches in history.

 

I try to do a bit of both. I have a core of investments I literally never sell. I have additional allocations to those core positions that I allow myself to trade. Then I also have a percentage of capital that is purely for trading. It varies on a short term basis with regards to what works better. I wouldn't recommend falling in love with either strategy, just staying flexible and open minded. Earlier in the decade I made a lot more money on the buy and hold stuff. The last few years its been trading. This year in fact my core stuff was pretty abysmal, with the top 5 maybe doing half of what the S&P did. Whereas I did triple digits trading. Things like CLF did virtually nothing on a buy and hold basis, but generated solid returns via trading. MSG I held and even added to, but never sold a share, and it returned like 10% for the year. The flaw with this managers analogy with compounding, is that buying and holding is not the only way to compound capital. Not even close. I'd probably argue in fact, thats its easier to compound(ignoring taxes) just bouncing around to the highest conviction ideas. Theres something mentally, that prohibits valuation sensitive investors from ever being involved in a 10 bagger or 100 bagger. You will NEVER own a NFLX or AMZN or TSLA all the way through if you pay attention to those things. But, you can fairly easily, consistently(like on a regular basis) find ways to pick up a quick 3-5%, over and over and over again.

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I have mixed feelings on this front too, and I've occupied various positions in the spectrum of how to handle the question of whether or not to sell.

 

Phase 1 - I used to be very much a buy-and-hold investor, with very few positions in great companies that I left alone and one or two duds I thought were great long-term investments where the story changed along the way.

 

Phase 2 - Then I became a little more active, especially as I had more new money to invest and had absorbed many lessons. I'm still an Intrinsic Value investor looking for companies with long-term compounding, moats and negligible debts or blow-up risks, with a fair orientation towards GARP as before, but my approach to selling became:

1. Sell if the company has changed for the worse or you were wrong in your initial assessment (have always tried to do this).

2. Sell if it's ludicrously overvalued (have never done this for a GARP position, though I have sold one or two more speculative positions as the likely reward became modest and the downside risk became elevated, which helped me dodge some of the 2018 mini bear market).

3. Value Trading - generally to consider the relative price-to-IV ratios of my positions, combined with a sense of risk-reward balance and only to sell if I have a reasonable margin of safety if enhancing my portfolio IV. If I need to make a decision on where to raise money to fund a new position, this helps. Could also trade a lower quality company for a higher quality company in this way to reallocate my funds towards the better quality positions.

 

Phase 3 - I'm evolving slowly and I'm certainly trying to train myself to identify and pay up rather more for very strong compounders where I can be confident of the moat and the integrity of management. This would probably be in conjunction with modest-growth safe compounders usually bought at pretty fair to cheap valuations that don't price in much growth.

 

Too many people miss out on 10-baggers or 50-baggers by selling them as 2-baggers after a quick gain and never getting back in because it never reaches that high conviction price again where they originally bought, and Akre's article is a rather good summary of this.

 

Many investors wrongly expect their portfolio performance should be statistically spread over many well-performing stocks, whereas in practice many of the best outperforming managers have one or two statistical outliers that contribute the majority of their gains while the other positions are very so-so, but they managed to hold on to the winners for decades despite becoming unusually concentrated in those positions as they delivered amazing growth. In other words, don't necessarily trim your big winners to add to your losers if the winners are justifying their winning status by their fundamental performance. That's like cutting the flowers and fertilising the weeds to paraphrase Peter Lynch, I believe.

 

Berkshire has bought Coca-Cola KO and held for decades, despite it trading for 40x earnings with only modest earnings growth expected at various times. American Express AXP has similarly been an enormously long-term holding, and I wouldn't be surprised if AAPL, WFC and BAC are seen to be similarly 'near-permanent' by the end of 2029 probably all having paid accumulated dividends amounting to a sizeable portion of their purchase price.

 

It can also make an investor nervous when a position grows to become a large proportion of the portfolio and they fear it may be re-rated downwards, but often the best long-term investors let them run even well above prices where they wouldn't buy, as Chuck says.

 

My intention in future (save for when a business is not as good as I thought or has become worse than it used to be) is to try to make it much less likely that I'll switch when there's a big difference in underlying compound growth rates in favour of the more richly-valued position so that I don't miss out on good compounding by selling unless I have an even better compounder to trade into.

 

And if there is a new high conviction compounder I want to invest in and I need to trim something else to fund the purchase, I'd often be better off selling something with very pedestrian growth yet a cheap valuation than to trim something with high compound growth and a fairly high multiple.

 

I would then try to avoid the pitfall of selling out of very strong compounders when they're a bit richly priced in exchange for more modest compounders that are just outright cheap right now unless I also ensure that I'm willing and prepared in advance to get back into the strong compounders later without insisting they be quite as cheap as my original purchase price when measured on the basis of near-term earnings yield or P/E ratio, otherwise I'm swapping strong compounding for modest compounding and a one-time kick from re-valuation of the modest compounder, without using that to restore or increase my holding in the strong compounder.

 

Ideally, I'm think I might sell, for example, 1000 shares of a strong compounder STRONGCO at a rich valuation to buy a modest compounder MODCO with an unusually large margin of safety, high certainty and great downside protection and a catalyst for 25%+ gain within a few months to a year tops. I'd count it as a success if the proceeds of selling MODCO after this round-trip are sufficient to buy back, say, 1100 shares or more of STRONGCO the strong compounder, a 10% increase in one of my best long-term positions, but I'd probably want to aim at the start for something that I'd expect to provide about a 20% increase in share count (a reasonable margin of safety) to account for continued fundamental growth of STRONGCO while I've taken some of my money away or to allow for a longer time to realise the re-rating of MODCO. If MODCO fails to make the gains I expected, I may simply have to settle for only being able to afford 900 shares of STRONGCO after the bad round trip where STRONGCO continued compounding its fundamentals, costing me 10% of my position but a least allowing me to keep 90% in a great compounder and maybe make it up with a future round-trip value opportunity that does work out.

 

It's probably good to have a more appropriate metric than Price to 1-year's earnings, such as price to 5th-year projected earnings or free cash flow that gives you permission to pay justifiably higher current multiples for good growth stocks with moats yet without paying silly 100x multiples that are priced beyond perfection by projecting beyond time horizons one can realistically project. Mungofitch on the Motley Fool Berkshire Board outlined quite a decent approach to comparing high-growth valuations to low-growth valuations along these lines and it resonated with me, and it's not out of line with the typical fair-PE ratios for growth companies theoretically outlined from DCFs, without the DCF's tendency to produce ludicrously high valuations.

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Guest cherzeca

I have found that in matters relating to investment (selling a winner) and social relations in particular, it is good from time to time to do things you dont want to do (at least upon first reflection), on the theory that you are making an investment in discipline by doing so, because discipline is like a muscle that needs to be exercised, and that discipline will come in good stead down the road.  you may regret the action with hindsight, but you have become stronger in decision making ability notwithstanding the "mistaken" action.

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Akre Focus Fund ( https://www.akrefund.com/ ) has good returns. They also have good business selection and holding criteria.

 

However, their inception date is 8/31/2009, so there is a question how they will perform through next serious crash/downturn.

 

Also, if not selling based on fundamentals, what other guidelines is one using?

 

They answer this in the article 8) :

 

there may be times when we believe it is appropriate and necessary to sell. These include, but are not limited to, when a business (1) is no longer growing at an above-average rate, (2) has had its competitive advantage impaired, or (3) has had an adverse change in management.

 

Not that these criteria are easy to handle properly, as the discussion above regarding DIS shows.

 

You could also put on an objective-backward-looking hat and wonder how this philosophy would have handled Microsoft (would Ballmer time be "adverse change in management"? would losing mobile phone market be "competitive advantage impaired"? was "Peak PC" indication of "no longer growing at an above-average rate"? Selling at the time when Microsoft was losing mobile, at Peak PC, before Ballmer left was the worst time to sell...

 

Akre apparently managed to side-step Valeant disaster that killed Sequoia performance.

 

They are quite concentrated in cell tower stocks. I wonder if that area could have some event that kills stocks across the bow before Akre gets out.

 

Overall though, they have performed better than a lot of known investors. One could have done well buying the fund after Chuck's talk at Fairfax Lollapalooza couple years ago.

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I remember reading Akre's OID interview in 2006. What happened to his older funds?

 

 

Akre Focus Fund ( https://www.akrefund.com/ ) has good returns. They also have good business selection and holding criteria.

 

However, their inception date is 8/31/2009, so there is a question how they will perform through next serious crash/downturn.

 

Also, if not selling based on fundamentals, what other guidelines is one using?

 

They answer this in the article 8) :

 

there may be times when we believe it is appropriate and necessary to sell. These include, but are not limited to, when a business (1) is no longer growing at an above-average rate, (2) has had its competitive advantage impaired, or (3) has had an adverse change in management.

 

Not that these criteria are easy to handle properly, as the discussion above regarding DIS shows.

 

You could also put on an objective-backward-looking hat and wonder how this philosophy would have handled Microsoft (would Ballmer time be "adverse change in management"? would losing mobile phone market be "competitive advantage impaired"? was "Peak PC" indication of "no longer growing at an above-average rate"? Selling at the time when Microsoft was losing mobile, at Peak PC, before Ballmer left was the worst time to sell...

 

Akre apparently managed to side-step Valeant disaster that killed Sequoia performance.

 

They are quite concentrated in cell tower stocks. I wonder if that area could have some event that kills stocks across the bow before Akre gets out.

 

Overall though, they have performed better than a lot of known investors. One could have done well buying the fund after Chuck's talk at Fairfax Lollapalooza couple years ago.

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Chuck has been doing well for his investors since the early 90's.  I would suggest contacting his firm to try and get his long-term numbers.  They are usually willing to share the results, but maybe not anymore.  The results are tied to separately managed accounts that go back longer than the mutual funds.  Part of the problem is portability of returns. Therefore, you could also go back and dig up the results on the FBR focus fund that he managed, which also did quite well.

 

This is a great thread...thanks for starting it chrispy.

 

 

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Chuck has been doing well for his investors since the early 90's.  I would suggest contacting his firm to try and get his long-term numbers.  They are usually willing to share the results, but maybe not anymore.  The results are tied to separately managed accounts that go back longer than the mutual funds.  Part of the problem is portability of returns. Therefore, you could also go back and dig up the results on the FBR focus fund that he managed, which also did quite well.

 

This is a great thread...thanks for starting it chrispy.

 

It looks like Akre did a clean transition from FBR to Akre:

He left FBR fund in September 2009 ( https://www.marketwatch.com/story/top-manager-quits-mutual-fund-2009-08-05 ) and Akre fund was started in August 2009, so you can't blame him of hiding out without fund during crisis.

FBR 2008 results are bad, but not horrible: https://archive.fortune.com/2009/05/13/pf/funds/fbr_focus_fund_akre.fortune/index.htm

 

Interestingly, he owned AMT and ORLY for years before Akre Fund. So he has held AMT for ~17 years and ORLY for ~12 years now.

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Glad some folks have enjoyed it as I have also enjoyed the subsequent conversation.

 

Correct, he bought AMT all the way down to like $0.85 in 2003. They also bought it in their private partnership. That's his 2nd 100 bagger (BRK being the first). He says in the YouTube investors talk he wishes they could be more concentrated and their private partnership is (4 stocks). I'm guessing it's AMT, MasterCard and 2 others

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Now I remember that Chuck Akre was in the “Invest like the best podcast”, where he explained his three legged stool approach and how they came about AMT. As I recall, they had a position before the stock declined substantially, which they used to average up in.

http://investorfieldguide.com/akre/

 

I like his approach. I looked at his fund's portfolio after his talk at Fairfax event. And AMT looked expensive. And now it looks very expensive too. So I look at this and I think, would I really want 11+% of my portfolio be in AMT? Not really. (Although similar argument could have been made couple years ago and here we are with AMT and Akre performing well.)

 

I guess that's the issue of buying even well performing funds. 

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