Fairfax 2025

[djokovic1]

The combination of getting paid to invest float (i.e good underwriting) and having the ability to invest it wisely is a superpower. As far as I know, very few insurance companies take on the responsibility to invest themselves (especially the non fixed income side).

 

The few that do it, have had tremendous compounding. Berkshire, Fairfax, Markel (despite recent challenges, long term is great). And maybe a new one for some on this board, Protector from Sweden.

[ValueMaven]

Prem has written before about Henry Singleton of Teledyne ... Singleton reduced Teleydyne's shares outstanding by 90% toward the back-half of his career.  I'm wondering if something similar could happen to FFH.  Give it another 5 years of current buyback pace and things could be very interesting.

[Junior R]

52 minutes ago, ValueMaven said:

Prem has written before about Henry Singleton of Teledyne ... Singleton reduced Teleydyne's shares outstanding by 90% toward the back-half of his career.  I'm wondering if something similar could happen to FFH.  Give it another 5 years of current buyback pace and things could be very interesting.

if this happens this would be the biggest accomplishment ...Even BRK has never been able to do that...COBF might then own a good 10% of all outstanding shares lol

[Crip1]

No-brainer vs Brainer

 

Back in 2022 or 2023 when Fairfax was trading below BV, many folks on this board were frustrating on how the market had not yet figured out the value that the company offered. I offered a slightly different take on things, specifically, that with the company’s intrinsic value increasing at the rate it was, trading below BV was a blessing in that it was a complete no-brainer to hold or even buy more. Further, if the company did see substantial expansion of Price to BV, it would increase temptation to sell…and that’s what has happened.

 

Now that it’s selling at 1.6x BV (arguably 1.3 or 1.4 real BV, holding or buying more Fairfax is less of a “no brainer”, and the more the price to BV expands, the less of a no-brainer it’s going to be…that simply makes holding it more difficult. And I am likely not the only one who has seen Fairfax become a substantial portion of their overall portfolio. It has been my top holding for a while, but with the increase in value, it was a little less in percentage terms than #2 and #3 combined. Now, it’s in excess of numbers 2 through 5…that’s pretty big. And, yes, I am quite familiar with the Mae West quote of "Too much of a good thing can be wonderful".

 

Personally, I am not tempted to sell right now for a few reasons:

·         Sometimes I will sell a holding that I like if it becomes wildly over-valued with the belief that it will, in time, become more appropriately valued by the market and I can get back in at a better price. My experience in doing this is mixed, but slightly more positive than negative.

·         As referenced in other posts, Fairfax’ BV is understated but the earning power of the company is not.

·         I can’t think of another company I think is clearly a better but.

 

But, as these things change, then there will be a stronger temptation. The game has changed.

 

-Crip

[Viking]

The median earnings estimate for Fairfax for Q2 is about $40/share. I am going to stick my neck out and take the over (yes, that was my attempt at humour). Q2 could be a very good quarter for Fairfax. There are lots of tailwinds for reported earnings. And even more good news.
 

1.) The equity portfolio is up about $2.0 billion or $91/share in Q2. The market to market piece is up about $36/share (pre-tax). 
2.) Digit is up significantly in Q2. Part of Fairfax’s position is mark to market. We should see a nice sized unrealized gain here. 
3.) Interest rates are lower at June 30 than March 31. This means Fairfax will see unrealized gains in its bond portfolio. This gain will boost reported unrealized gains even more (so it will likely surprise people - in a good way). Yes, there will be an offset with IFRS 17. But there will be a net benefit to Fairfax. 
4.) Currency will be another tailwind. US$ strength has been a headwind to Fairfax’s reported results for the past couple of years (net income and the OCI impact on book value). US$ weakness is a tailwind to Fairfax’s reported results (net income and OCI impact on book value). One could argue that US$ strength is another example of how Fairfax’s book value today is understated.

5.) Underwriting results should be solid. It will be interesting to see where reserve releases come in - if they are similar to Q1 we could see a beat here too. 
 

The excess of FV over CV for associate and consolidated holdings just keeps blowing out more and more each quarter. My guess is Q2 will come in at around $2.5 billion. This is up from $1.4 billion at March 31, 2025, which is an increase of $900 million in the quarter ($42/share pre-tax). This will not be captured in Fairfax’s Q2 accounting results but it is economic value that is being created.
 

Bottom line, Fairfax is poised to report a nice beat when it reports Q2 earnings. But its increase in economic value in Q2 will be much better than the reported results. Book value is becoming a less useful as a tool to value Fairfax. Investors who worship primarily at the P/BV altar need to think about this…

Edited July 1, 2025 by Viking

[Viking]

1 hour ago, Crip1 said:

No-brainer vs Brainer

 

Back in 2022 or 2023 when Fairfax was trading below BV, many folks on this board were frustrating on how the market had not yet figured out the value that the company offered. I offered a slightly different take on things, specifically, that with the company’s intrinsic value increasing at the rate it was, trading below BV was a blessing in that it was a complete no-brainer to hold or even buy more. Further, if the company did see substantial expansion of Price to BV, it would increase temptation to sell…and that’s what has happened.

 

Now that it’s selling at 1.6x BV (arguably 1.3 or 1.4 real BV, holding or buying more Fairfax is less of a “no brainer”, and the more the price to BV expands, the less of a no-brainer it’s going to be…that simply makes holding it more difficult. And I am likely not the only one who has seen Fairfax become a substantial portion of their overall portfolio. It has been my top holding for a while, but with the increase in value, it was a little less in percentage terms than #2 and #3 combined. Now, it’s in excess of numbers 2 through 5…that’s pretty big. And, yes, I am quite familiar with the Mae West quote of "Too much of a good thing can be wonderful".

 

Personally, I am not tempted to sell right now for a few reasons:

·         Sometimes I will sell a holding that I like if it becomes wildly over-valued with the belief that it will, in time, become more appropriately valued by the market and I can get back in at a better price. My experience in doing this is mixed, but slightly more positive than negative.

·         As referenced in other posts, Fairfax’ BV is understated but the earning power of the company is not.

·         I can’t think of another company I think is clearly a better but.

 

But, as these things change, then there will be a stronger temptation. The game has changed.

 

-Crip

@Crip1, I loved your post. I am thinking along the same line as you. I have been reading up on Philip Fisher. in particular his selling discipline. His view was if you find an exceptional business you would be an idiot to sell it (at pretty much any price). I am working on a post on this topic (it is probably about a week away from being done). 
 

Buffett says 12 investments over 60 years is what separated him from being an average investor. When he found an exceptional business he didn’t sell it - at any price. Buffett said way back that he was 85% Graham and 15% Fisher. I think the ‘buy exceptional businesses and when you find one (that is the really hard part) you never sell them (as long as they continue to be exceptional)’ is what Buffett learned from Fisher. 
 

Buffett and Fisher play a different game than most other investors - find exceptional businesses and then ride them for as long as possible (ignoring the price volatility - in both directions).
 

What I have been trying to figure out for the past 18 months: Is Fairfax an exceptional business? I think they might be. The answer to that question informs my sell decision on the stock. 
 

Below is a quote from John Train’s book The Money Masters, where he profiles Philip Fisher. Ignore the highlighted and underlined parts (they are not mine). 

 

Edited July 1, 2025 by Viking

[Parsad]

2 minutes ago, Viking said:

 

What I have been trying to figure out for the past 18 months: Is Fairfax an exceptional business?

 

 

 

I'm pretty sure they've been an "unexceptional no moat" company for the last 5 years!  Cheers!

[gfp]

13 minutes ago, Parsad said:

 

I'm pretty sure they've been an "unexceptional no moat" company for the last 5 years!  Cheers!

 

They sell an undifferentiated commodity product and their investment track record has been "spotty" !  Look out below

[Hoodlum]

1 hour ago, Viking said:

The median earnings estimate for Fairfax for Q2 is about $40/share. I am going to stick my neck out and take the over (yes, that was my attempt at humour). Q2 could be a very good quarter for Fairfax. There are lots of tailwinds for reported earnings. And even more good news.
 

1.) The equity portfolio is up about $2.0 billion or $91/share in Q2. The market to market piece is up about $36/share (pre-tax). 
2.) Digit is up significantly in Q2. Part of Fairfax’s position is mark to market. We should see a nice sized unrealized gain here. 
3.) Interest rates are lower at June 30 than March 31. This means Fairfax will see unrealized gains in its bond portfolio. This gain will boost reported unrealized gains even more (so it will likely surprise people - in a good way). Yes, there will be an offset with IFRS 17. But there will be a net benefit to Fairfax. 
4.) Currency will be another tailwind. US$ strength has been a headwind to Fairfax’s reported results for the past couple of years (net income and the OCI impact on book value). US$ weakness is a tailwind to Fairfax’s reported results (net income and OCI impact on book value). One could argue that US$ strength is another example of how Fairfax’s book value today is understated.

5.) Underwriting results should be solid. It will be interesting to see where reserve releases come in - if they are similar to Q1 we could see a beat here too. 
 

The excess of FV over CV for associate and consolidated holdings just keeps blowing out more and more each quarter. My guess is Q2 will come in at around $2.5 billion. This is up from $1.4 billion at March 31, 2025, which is an increase of $900 million in the quarter ($42/share pre-tax). This will not be captured in Fairfax’s Q2 accounting results but it is economic value that is being created.
 

Bottom line, Fairfax is poised to report a nice beat when it reports Q2 earnings. But its increase in economic value in Q2 will be much better than the reported results. Book value is becoming a less useful as a tool to value Fairfax. Investors who worship primarily at the P/BV altar need to think about this…

 

@Viking  A great summary of some of the tailwinds that will impact Q2 results, although it is difficult for us to accurately determine what they would be in some cases. 

 

The one I was thinking about today was the currency tailwind and what impact that would have on the Book value.  So I went back to Q4 where the Fairfax results included a $22/share unrealized foreign currency net loss.  I took a quick look at the swing of the CAD/EUR vs the USD in Q4 and then compared the same during Q2.  I should not have been surprised to notice that the swing in Q2 was almost exactly the same as it was in Q4, except in the opposite direction.  It would not surprise me if we see close to a $20/share unrealized foreign currency net gain in BV reported for Q2.
 

 

Edited July 1, 2025 by Hoodlum

[Junior R]

3 hours ago, Viking said:

@Crip1, I loved your post. I am thinking along the same line as you. I have been reading up on Philip Fisher. in particular his selling discipline. His view was if you find an exceptional business you would be an idiot to sell it (at pretty much any price). I am working on a post on this topic (it is probably about a week away from being done). 
 

Buffett says 12 investments over 60 years is what separated him from being an average investor. When he found an exceptional business he didn’t sell it - at any price. Buffett said way back that he was 85% Graham and 15% Fisher. I think the ‘buy exceptional businesses and when you find one (that is the really hard part) you never sell them (as long as they continue to be exceptional)’ is what Buffett learned from Fisher. 
 

Buffett and Fisher play a different game than most other investors - find exceptional businesses and then ride them for as long as possible (ignoring the price volatility - in both directions).
 

What I have been trying to figure out for the past 18 months: Is Fairfax an exceptional business? I think they might be. The answer to that question informs my sell decision on the stock. 
 

Below is a quote from John Train’s book The Money Masters, where he profiles Philip Fisher. Ignore the highlighted and underlined parts (they are not mine). 

 

I am also trying go down this path and trying to make 40% - 60%+ of my portfolio like this with exceptional business ...Currently only two stocks fit that boat FFH and APO...The rest are just undervalued stocks like JOE, UNH, UPS, CG, PAX,  ect....I am always looking for more stocks to add I can keep for the long term...The one thing I love about FFH over BRK is that FFH pays a dividend even though its a small % it does add...Also since their market cap and investment portfolio is small compared to the markets its very easy for them to buy undervalued companies...1b + in capital gains every couple years can take this stock to new heights...

Edited July 1, 2025 by Junior R

[netcash1]

UPS be careful it could be getting disrupted by AMZN

[Junior R]

6 minutes ago, netcash1 said:

UPS be careful it could be getting disrupted by AMZN

They already said they are exiting that business as it's unprofitable 

[netcash1]

Euronext in talks to buy Athens Stock Exchange for $470 million

 

Decent validation on the improvements in the Greek Economic system

[Thrifty3000]

2 hours ago, netcash1 said:

Euronext in talks to buy Athens Stock Exchange for $470 million

 

Decent validation on the improvements in the Greek Economic system

According to WSJ Greece is a top destination for the roughly 16,000 millionaires expected to move out of the UK this year due to unfavorable tax treatment. A few thousand inbound millionaires could be a nice tailwind for some local bankers and economies. 

[Crip1]

20 hours ago, Viking said:

@Crip1, I loved your post. I am thinking along the same line as you.

 

Much appreciated...quite humbling coming from you. 

 

-Crip

[Thrifty3000]

Well, with the BBB helping shovel $3 trillion+ annually onto the debt pile, is it safe to assume Fairfax will likely be enjoying higher interest rates for the next decade and beyond?
 

Especially if AI and automation simultaneously drive the most rapid productivity advances in history, ergo increasing deflationary pressure, ergo decelerating growth of taxable revenue, ergo increasing risk of government insolvency and inflation, ergo ever increasing interest rates for Fairfax.

 

Could be quite a tailwind for FFH.

Edited July 3, 2025 by Thrifty3000

[gfp]

6 minutes ago, Thrifty3000 said:

Well, with the BBB helping shovel $3 trillion+ annually onto the debt pile, is it safe to assume Fairfax will likely be enjoying higher interest rates for the next decade and beyond?
 

Especially if AI and automation simultaneously drive the most rapid productivity advances in history, ergo increasing deflationary pressure, ergo decelerating growth of taxable revenue, ergo increasing risk of government insolvency and inflation, ergo ever increasing interest rates for Fairfax.

 

Could be quite a tailwind for FFH.

 

No.  I would not assume any of that

[TwoCitiesCapital]

48 minutes ago, Thrifty3000 said:

Well, with the BBB helping shovel $3 trillion+ annually onto the debt pile, is it safe to assume Fairfax will likely be enjoying higher interest rates for the next decade and beyond?
 

Especially if AI and automation simultaneously drive the most rapid productivity advances in history, ergo increasing deflationary pressure, ergo decelerating growth of taxable revenue, ergo increasing risk of government insolvency and inflation, ergo ever increasing interest rates for Fairfax.

 

Could be quite a tailwind for FFH.

 

I think if you really envision a debt spiral for the U.S. - what you also have to envision is the government capping interest rates like they did in WW2 and restrictions on capital flows. 

 

So I don't necessarily think you get a secular tailwind of an upward rate trend. Will interest rates be higher in the 2020s then they were in the 2010s - sure. But will they be significantly higher than the 4.5 - 5.5%-ish we've seen this cycle? Probably not significantly so. 

[LC]

Yeah I'd imagine more debt = more incentive to lower rates? 

[SafetyinNumbers]

2 hours ago, TwoCitiesCapital said:

 

I think if you really envision a debt spiral for the U.S. - what you also have to envision is the government capping interest rates like they did in WW2 and restrictions on capital flows. 

 

So I don't necessarily think you get a secular tailwind of an upward rate trend. Will interest rates be higher in the 2020s then they were in the 2010s - sure. But will they be significantly higher than the 4.5 - 5.5%-ish we've seen this cycle? Probably not significantly so. 

Is some yield curve control already happening? The administration is trying not to issue long bonds to reduce supply and not lock in “high” rates. Presumably, the next Fed Chair will slash the short end of the curve next year if Powell doesn’t get started soon.

 

I’m wondering what happens to corporate spreads in that environment. They in theory should be wider to reflect inflation risk.

[Hoodlum]

Current projections suggest we will not see reinsurance ROE drop during the next 2-3 years, like we experienced prior to the recent hard market.

 

https://www.reinsurancene.ws/reinsurer-returns-to-remain-robust-with-steady-roe-through-2027-guy-carpenter/

 

[Viking]

Is it time to sell Fairfax? What can Philip Fisher Teach us?

 

Over the past 4.5 years, Fairfax’s stock has delivered a total return (US$) of 430% and a CAGR of 44.9%. Over this same time frame, it has also paid a total of $60 in dividends ($10/share in January of 2021, 2022 and 2023 and $15/share in 2024 and 2025).

 

How does this compare to the overall market?

 

Over the past 4.5 years, the S&P500 has delivered a total return of 65% and a CAGR of 11.8% (not including dividends).

 

The performance of Fairfax’s share price the past 4.5 years has been excellent - both in absolute and in relative terms.

 

 

Is it time to sell Fairfax?

 

After such a massive increase in the share price, what is a rational investor to do?

 

Why SELL of course. At least that is what I probably would have done in the past.

 

Successful investors need to get two things right: when to buy AND when to sell.

 

Over my career as an investor, I have been much better at the ‘when to buy’ decision than the ‘when to sell’ decision. I have a history of selling my big winners way too early. An example? After more than a 100% gain over a couple of years, I sold most of my concentrated position in Apple in 2016 - right around the time some guy named Warren Buffett started to buy shares.

 

What was my mistake?

 

My sell decision was focussed primarily on price.

 

Back in 2014 and 2015, Apple was well managed. The fundamentals of the business were improving. Capital allocation at the company was very good. Its prospects were very good. In summary, Apple was a high quality company.

 

Even after the big spike in the share price over 24 months the stock was still cheap when I sold it in 2016. The crazy part is I knew all of this - I follow my largest positions very closely.

 

Mistakes will be made

 

All investors make mistakes. The key is to not make a habit of it.

 

Past mistakes, if learned from and corrected, can sew the seeds for the big winners in the future.

 

Clearly, the ‘when to sell’ part of my investing framework needed to be improved.

 

—————

 

If It’s Gone This High Already, How Can It Possibly Go Higher?

 

I love this quote from Peter Lynch.

 

“If I’d bothered to ask myself, “how can this stock possibly go higher,” I would never have bought Subaru after it already had gone up twentyfold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made sevenfold after that.

 

“The point is, there’s no arbitrary limit to how high a stock go, and if the story is still good, the earnings continue to improve, and the fundamentals haven’t changed, “can’t go much higher” is a terrible reason to snub a stock. Shame on all those experts who advise clients to sell automatically after they double their money. You’ll never get a tenbagger doing that.

 

“Frankly, I’ve never been able to predict which stocks will go up tenfold, or which will go up fivefold. I try to stick with them as long as the story’s intact, hoping to be pleasantly surprised. The success of a company isn’t the surprise, but what the shares bring often is.”

 

Peter Lynch - One Up on Wall Street – p. 266 & 267

 

Bottom line, using the stock price as your primary guide for ‘when to sell’ is a pretty poor approach. Especially when you find a great company, like I had done with Apple.

 

—————

 

In age remainder of this post, let’s explore the ‘when to sell’ decision in a little more detail to see what we can learn.

 

Let’s start with a simple question:

 

When does it make sense to sell a stock?

 

I have come up with 7 ‘typical’ reasons. Yes, our list is arbitrary. But it will provide a useful way to discuss the topic of ‘when to sell’ a stock. We are also going to get some help from Philip Fisher (and Chapter 6 of his book, Common Stocks and Uncommon Profits).

 

—————

 

Who is Philip Fisher?

 

Fisher is one of the GOAT’s. After Graham, he likely had the greatest influence on Buffett’s investing style. (Munger was also a big fan of Fisher.)

 

In 1990, Buffett said his investing style was 85% Graham and 15% Fisher. Did Buffett’s shift even more towards Fisher after 1990? Probably.

 

Fisher is worthy of study.

 

—————

 

7 reasons to sell a stock.

 

The first 2 reasons are personal. And the next 5 reasons are financial.

 

What are the personal reasons to sell a stock?

 

1.) Life need - you need some cash to cover a life expense.

 

Perhaps you are buying a house and you need money for a down payment. Perhaps you are older and you want to help your kids out (with school or to ‘pay it forward’ early). It is best to plan ahead for big life events so the cash is available when you need it. Buffett says if you need the cash in the next 5 years it probably shouldn’t be invested in stocks. Personally, I shorten this time period to three years.

 

It is important to have a financial plan. Part of that plan will include your near-term large life spending needs. You may need to sell some stocks to have an appropriate amount of cash on hand to ensure your life spending needs for the coming years are covered.

 

2.) When a single holding gets too big - you need to sleep well at night.

 

For unsophisticated investors, concentration is generally a terrible idea. That is because they don’t have the time/inclination/skill that is needed to be successful with a concentrated stock portfolio. For these investors, diversification is a key strategy. As part of that framework, it is important to have a maximum position size for an individual stock (perhaps something like 5%).

 

For sophisticated investors having a concentrated portfolio can work. But even then, it makes sense to have a maximum position size for an individual stock (for Buffett it was 40%).

 

For both types of investors, when a stock goes over that position size it should be sold - to bring the weighting back down to the maximum position size.

 

Selling a stock for personal reasons generally has little to do with the company, management, fundamentals, prospects or the valuation of the business.

 

Given Fairfax’s spike higher over the last 5 years, this reason for selling is likely on the minds of many Fairfax shareholders. This is an important topic and needs/warrants its own (lengthy) post so we aren’t going to go in to any more detail on it here.

 

Let’s now pivot and look at some of the financial reasons for selling a stock.

 

What are the financial reasons to sell a stock?

 

We have come up with 5 financial reasons to sell at stock. The first 3 are defensive in nature. And the last 2 are offensive in nature.

 

————-

 

3.) If you made a mistake with your purchase.

 

Your understanding of a company will generally be at its lowest level when you make your first purchase of shares.

 

Mistakes will happen when investing. That is a given. It is best to figure this out quickly. And then act.

 

Sounds pretty simple… You made a mistake. You recognize you made a mistake.  You quickly correct the mistake. You are golden. That is what any rational investor would do.

 

So what’s the problem?

 

Ego. (Often the enemy of being rational.)

 

Ego stops you from recognizing that you made a mistake.

 

Mistakes usually result in losses. Most investors have a hard time selling stocks that are in a loss position. Instead, they wait for the stock to return to their purchase price - they will sell it then (they tell themselves). The problem is mistakes don’t usually return to an investors purchase price.

 

“None of us likes to admit to himself that he has been wrong. If we have made a mistake in buying a stock but can sell the stock at a small profit, we have somehow lost any sense of having been foolish. On the other hand, if we sell at a small loss we are quite unhappy about the whole matter. This reaction, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.” Philip Fisher - Common Stocks and Uncommon Profits

 

Holding on to mistakes then results in a second bigger problem.

 

The funds can’t be redeployed into a better opportunity.

 

“More money has probably been lost by investors holding a stock they really did not want until they could “at least come out even” than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous.” Philip Fisher - Common Stocks and Uncommon Profits

 

The bigger cost of holding on to mistakes is the opportunity cost. The financial cost can be massive - and only grows the longer the mistake is held. This is an example of compounding working in reverse. Good luck getting wealthy with a bunch of stocks like this in your portfolio.

 

There are two direct financial costs to making a mistake with your original purchase:

1. The decline in value of the mistake you continue to own.
2. The opportunity cost: What you could have earned if you had shifted the funds to a better opportunity.

Given enough time, the second ‘loss’ can be much bigger than the first.

 

There is another cost of holding on to mistakes - that is the significant psychological cost to the investor. These positions suck the life out of an investor over time - these positions are like the dementors in the Harry Potter movies. Being a successful investor is exceptionally difficult. It is important to be in a good mental state as much as possible. This will allow you to think and act in a more rational way over time.

 

It is rational to sell a stock when you become confident/convinced that you have made a mistake. And the sooner you act the better.

 

————-

 

The next two reasons you might want to sell a stock apply to businesses you have owned for years. Sometimes things change. Management. Fundamentals. Prospects. Industry. And what was once a good investment is no longer the case.

 

4.) Management disappoints/frustrates

 

Management is a critical part of the investing decision. That is because bad management can destroy shareholder value.

 

Fisher provides two general types of causes that might result in management messing up badly.

 

Perhaps the existing management team loses their way. Like Fairfax did from 2012 to 2018.

 

“Sometimes management deteriorates because success has affected one or more key executives. Smugness, complacency, or inertia replace the former drive and ingenuity.” Philip Fisher - Common Stocks and Uncommon Profits

 

Or the issue might happen after a leadership transition. Like perhaps what is happening with Markel today.

 

“More often it occurs because a new set of top executives do not measure up to the standard of performance set by their predecessors. Either they no longer hold to the policies that have made the company outstandingly successful, or they do not have the ability to continue to carry out such policies.”  Philip Fisher - Common Stocks and Uncommon Profits

 

When management messes up badly, it is generally best to sit things out. You can get back in after management demonstrates they have corrected their ways. Like Fairfax eventually did. We will see with Markel.

 

The next reason to sell is often tied at the hip with management.

 

————-

 

5.) When the economic characteristics/fundamentals of the business deteriorate in a meaningful way.

 

Very few businesses last forever - even the very good ones. Sometimes the issues are internal - the company loses out to competitors. Sometimes the issues are external - an entire industry gets disrupted. And its economics deteriorate over the years. Like what happened to newspapers.

 

The important thing is to monitor the situation and to stay open minded. When ‘the story’ takes a permanent turn for the worse then it makes sense to sell.

 

We can combine 4.) and 5.) together to make the following point. A few exceptional companies will be very good investments over the medium term. Even fewer companies will remain very good investments over the long term.

 

The next reason to sell is offensive in nature.

 

—————

 

6.) You find a much better opportunity.

 

Here is how Fisher put it:

 

“If the evidence is clear-cut and the investor feels quite sure of his ground, it will, even after paying capital gains taxes, probably pay him handsomely to switch into the situation with seemingly better

prospects.” Philip Fisher - Common Stocks and Uncommon Profits

 

This sounds easy. But this reason for selling a stock is full of potential pitfalls. And that is because of all the different assumptions that are involved in the decision (on both the sell and the buy sides) and the uncertainty it brings.

• What if the company you plan to sell is a better value than you think?
• What if the company you want to buy is not as good of a value as you think?

A variation of Peter Lynch’s observation:

 

Most importantly, you don’t want to cut your flowers and replace them by planting a bunch of weeds. Of course, investors don’t think they are doing this (when they swap an investment). But this is often what actually happens to investors and it is likely one of the big reasons their investment returns lag over time.

 

Selling a stock that you already own to buy a brand new stock should only happen when you have a high degree of certainty on all aspects of the decision.

 

—————

 

7.) The stock is trading at a premium to its intrinsic value.

 

This is the reason to sell a stock that was espoused by Ben Graham. Buy when a stock is cheap (margin of safety). Sell when a stock is no longer cheap. Rinse and repeat. Get rich.

 

The biggest strength of this framework is it is very easy to understand for retail investors. And it is also easy to teach.

 

It is important to remember: Graham’s goal was to come up with an investing framework that could easily be taught to the general public.

 

He was not trying to come up with an investing framework that would optimize results for sophisticated investors.

 

Here is the interesting thing. Fisher did not list this as a reason to sell.

 

Was this a mistake by Fisher? A reason he missed?

 

No. Fisher didn’t list this as a reason to sell because he was playing a completely different game than Graham was.

 

—————

 

Let’s flip the script.

 

Is there ever a situation when a stock should never be sold?

 

According to Fisher, the answer is yes.

 

Let’s explore this next. But we will move from the realm of the average retail investor to that of a sophisticated investor.

 

—————

 

Philip Fisher

 

There is a different way to play the investing game than the one that I outlined above. This method was first developed by Philip Fisher. And then picked up by none other than Warren Buffett/Charlie Munger.

 

What were some of important building blocks of Fisher’s investing framework?

• Only own high quality companies - determined primarily by qualitative factors (like management). Not determined primarily by quantitative factors. In many ways, Fisher’s approach is the opposite of Graham’s approach.
• Concentrate in the best ideas.
• Hold positions forever.

Fisher is unique in his sell strategy. That is what we want to focus on here.

 

Buy and hold forever

 

“If the job has been correctly done when a common stock is purchased, the time to sell it is—almost never.” Philip Fisher - Common Stocks and Uncommon Profits

 

This is, of course, one of the really important things Warren Buffett learned from Fisher. When you own an outstanding company you should never sell it. Even when it appears it might be overvalued.

 

Volatility and Mr Market

 

Fisher agreed with Graham that Mr Market was a manic depressive that should be exploited. But only to buy low.

 

When an investor sells a position when it is ‘no longer cheap’ they are now - perversely - allowing themselves to be exploited by Mr Market. They are getting tricked into selling a great company (who is likely to grow into an even bigger long term winner). Investors stop looking at their investment as a business - and they use price as their primary valuation tool.

 

John Train published ‘The Money Masters’ in 1980. He profiled 9 investors, including Philip Fisher. Below is how he summarized Philip Fisher’s thinking on ‘when to sell’:

 

“…if you have chosen the company properly in the first place, with a reasonable prospect that in ten years, say, the stock will have tripled or quadrupled, is it so important that it’s 35 percent overpriced today? And there’s always the possibility that the stock’s price reflects good news you don’t know about yet.

 

“Silliest of all, says Fisher, is selling out just because a stock has gone up a lot. The truly great company—the only kind he is interested in buying—will grow on and on, and its stock likewise. That it has advanced substantially since you bought it only means that everything is going just as it should.”

 

John Train (on Philip Fisher) - The Money Masters

 

—————

 

Warren Buffett (at the prodding of Charlie Munger) Embraces Fisher

 

As you can see from the above quote, Philip Fisher was playing a very different game than most other investors. Including most value investors. Buffett’s genius was not going ‘all in’ on Fisher’s methodology - but in using it for part of his investment portfolio.

 

When Buffett found an exceptional company - and he knew it - he held it for the long term. Decades. He might add to it on weakness. But he never sold it when it ran up in price. He didn’t sell it when it was ‘no longer cheap.’ He didn’t even sell it when it was obviously overvalued.

 

And Buffett has said that 12 decisions over 60 years is what separates his results from those of average investors (or one decision every 5 years). But what allowed these 12 decisions to become outstanding investments was what he learned from Fisher - it was his holding period of decades.

 

This approach is impossible for most investors to pull off. And that is because they are playing a completely different game. Fisher was content to get rich slow. Investors (throughout history) are focussed on getting rich as quickly as possible. As a result, Fisher’s approach is impossible for most investors to execute.

 

—————

 

What is my key takeaway from Philip Fisher?

 

I have no desire to try and become a 100% Philip Fisher type of investor. I don’t have the time, the desire or the skill to invest that way.

 

But like Buffett, i think I can become a 15% Philip Fisher type of investor. And that is because every 5 years or so, I have usually been able find one outstanding investment. Something I understand exceptionally well. Where my view of the business is different from ‘consensus’. Moving forward, when I find an outstanding business, I am going to try and get better at my sell discipline - and not be tempted to sell my position. When it gets fairly valued. And also when it appears that it might be overvalued.

 

Does this post have anything to do with Fairfax?

 

Yes. I think Fairfax might have blossomed over the past 5 years into one of those outstanding investments that Philip Fisher (and Warren Buffett) were always on the lookout for.

 

—————

 

One final word on the topic of selling from Peter Lynch

 

My biggest mistake was that I always sold stocks way too early. In fact, I got a call from Warren Buffett in 1989. My daughter picks up the phone and says, "It's Mr. Buffett on the line."

 

And I pick up the phone and I hear, "This is Warren Buffett from Omaha, Nebraska." You know, he talks so fast. "And I love your book, One Up On Wall Street, and I want to use a line from it in my year-end report. I have to have it. Can I please use it?

 

I said, "Sure. What's the line?" He says, "Selling your winners and holding your losers is like cutting the flowers and watering the weeds.”

That one line he picked up in my whole book has been my greatest mistake.

 

Peter Lynch - Forbes India, Collectors Edition - November 2017

 

Let’s go back to what Lynch said at the beginning of this post.

 

“I try to stick with them as long as the story’s intact.”

 

Doesn’t this sounds similar to Fisher’s approach when it came to selling?

[73 Reds]

12 minutes ago, Viking said:

Is it time to sell Fairfax? What can Philip Fisher Teach us?

 

Over the past 4.5 years, Fairfax’s stock has delivered a total return (US$) of 430% and a CAGR of 44.9%. Over this same time frame, it has also paid a total of $60 in dividends ($10/share in January of 2021, 2022 and 2023 and $15/share in 2024 and 2025).

 

How does this compare to the overall market?

 

Over the past 4.5 years, the S&P500 has delivered a total return of 65% and a CAGR of 11.8% (not including dividends).

 

The performance of Fairfax’s share price the past 4.5 years has been excellent - both in absolute and in relative terms.

 

 

Is it time to sell Fairfax?

 

After such a massive increase in the share price, what is a rational investor to do?

 

Why SELL of course. At least that is what I probably would have done in the past.

 

Successful investors need to get two things right: when to buy AND when to sell.

 

Over my career as an investor, I have been much better at the ‘when to buy’ decision than the ‘when to sell’ decision. I have a history of selling my big winners way too early. An example? After more than a 100% gain over a couple of years, I sold most of my concentrated position in Apple in 2016 - right around the time some guy named Warren Buffett started to buy shares.

 

What was my mistake?

 

My sell decision was focussed primarily on price.

 

Back in 2014 and 2015, Apple was well managed. The fundamentals of the business were improving. Capital allocation at the company was very good. Its prospects were very good. In summary, Apple was a high quality company.

 

Even after the big spike in the share price over 24 months the stock was still cheap when I sold it in 2016. The crazy part is I knew all of this - I follow my largest positions very closely.

 

Mistakes will be made

 

All investors make mistakes. The key is to not make a habit of it.

 

Past mistakes, if learned from and corrected, can sew the seeds for the big winners in the future.

 

Clearly, the ‘when to sell’ part of my investing framework needed to be improved.

 

—————

 

If It’s Gone This High Already, How Can It Possibly Go Higher?

 

I love this quote from Peter Lynch.

 

“If I’d bothered to ask myself, “how can this stock possibly go higher,” I would never have bought Subaru after it already had gone up twentyfold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made sevenfold after that.

 

“The point is, there’s no arbitrary limit to how high a stock go, and if the story is still good, the earnings continue to improve, and the fundamentals haven’t changed, “can’t go much higher” is a terrible reason to snub a stock. Shame on all those experts who advise clients to sell automatically after they double their money. You’ll never get a tenbagger doing that.

 

“Frankly, I’ve never been able to predict which stocks will go up tenfold, or which will go up fivefold. I try to stick with them as long as the story’s intact, hoping to be pleasantly surprised. The success of a company isn’t the surprise, but what the shares bring often is.”

 

Peter Lynch - One Up on Wall Street – p. 266 & 267

 

Bottom line, using the stock price as your primary guide for ‘when to sell’ is a pretty poor approach. Especially when you find a great company, like I had done with Apple.

 

—————

 

In age remainder of this post, let’s explore the ‘when to sell’ decision in a little more detail to see what we can learn.

 

Let’s start with a simple question:

 

When does it make sense to sell a stock?

 

I have come up with 7 ‘typical’ reasons. Yes, our list is arbitrary. But it will provide a useful way to discuss the topic of ‘when to sell’ a stock. We are also going to get some help from Philip Fisher (and Chapter 6 of his book, Common Stocks and Uncommon Profits).

 

—————

 

Who is Philip Fisher?

 

Fisher is one of the GOAT’s. After Graham, he likely had the greatest influence on Buffett’s investing style. (Munger was also a big fan of Fisher.)

 

In 1990, Buffett said his investing style was 85% Graham and 15% Fisher. Did Buffett’s shift even more towards Fisher after 1990? Probably.

 

Fisher is worthy of study.

 

—————

 

7 reasons to sell a stock.

 

The first 2 reasons are personal. And the next 5 reasons are financial.

 

What are the personal reasons to sell a stock?

 

1.) Life need - you need some cash to cover a life expense.

 

Perhaps you are buying a house and you need money for a down payment. Perhaps you are older and you want to help your kids out (with school or to ‘pay it forward’ early). It is best to plan ahead for big life events so the cash is available when you need it. Buffett says if you need the cash in the next 5 years it probably shouldn’t be invested in stocks. Personally, I shorten this time period to three years.

 

It is important to have a financial plan. Part of that plan will include your near-term large life spending needs. You may need to sell some stocks to have an appropriate amount of cash on hand to ensure your life spending needs for the coming years are covered.

 

2.) When a single holding gets too big - you need to sleep well at night.

 

For unsophisticated investors, concentration is generally a terrible idea. That is because they don’t have the time/inclination/skill that is needed to be successful with a concentrated stock portfolio. For these investors, diversification is a key strategy. As part of that framework, it is important to have a maximum position size for an individual stock (perhaps something like 5%).

 

For sophisticated investors having a concentrated portfolio can work. But even then, it makes sense to have a maximum position size for an individual stock (for Buffett it was 40%).

 

For both types of investors, when a stock goes over that position size it should be sold - to bring the weighting back down to the maximum position size.

 

Selling a stock for personal reasons generally has little to do with the company, management, fundamentals, prospects or the valuation of the business.

 

Given Fairfax’s spike higher over the last 5 years, this reason for selling is likely on the minds of many Fairfax shareholders. This is an important topic and needs/warrants its own (lengthy) post so we aren’t going to go in to any more detail on it here.

 

Let’s now pivot and look at some of the financial reasons for selling a stock.

 

What are the financial reasons to sell a stock?

 

We have come up with 5 financial reasons to sell at stock. The first 3 are defensive in nature. And the last 2 are offensive in nature.

 

————-

 

3.) If you made a mistake with your purchase.

 

Your understanding of a company will generally be at its lowest level when you make your first purchase of shares.

 

Mistakes will happen when investing. That is a given. It is best to figure this out quickly. And then act.

 

Sounds pretty simple… You made a mistake. You recognize you made a mistake.  You quickly correct the mistake. You are golden. That is what any rational investor would do.

 

So what’s the problem?

 

Ego. (Often the enemy of being rational.)

 

Ego stops you from recognizing that you made a mistake.

 

Mistakes usually result in losses. Most investors have a hard time selling stocks that are in a loss position. Instead, they wait for the stock to return to their purchase price - they will sell it then (they tell themselves). The problem is mistakes don’t usually return to an investors purchase price.

 

“None of us likes to admit to himself that he has been wrong. If we have made a mistake in buying a stock but can sell the stock at a small profit, we have somehow lost any sense of having been foolish. On the other hand, if we sell at a small loss we are quite unhappy about the whole matter. This reaction, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.” Philip Fisher - Common Stocks and Uncommon Profits

 

Holding on to mistakes then results in a second bigger problem.

 

The funds can’t be redeployed into a better opportunity.

 

“More money has probably been lost by investors holding a stock they really did not want until they could “at least come out even” than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous.” Philip Fisher - Common Stocks and Uncommon Profits

 

The bigger cost of holding on to mistakes is the opportunity cost. The financial cost can be massive - and only grows the longer the mistake is held. This is an example of compounding working in reverse. Good luck getting wealthy with a bunch of stocks like this in your portfolio.

 

There are two direct financial costs to making a mistake with your original purchase:

1. The decline in value of the mistake you continue to own.
2. The opportunity cost: What you could have earned if you had shifted the funds to a better opportunity.

Given enough time, the second ‘loss’ can be much bigger than the first.

 

There is another cost of holding on to mistakes - that is the significant psychological cost to the investor. These positions suck the life out of an investor over time - these positions are like the dementors in the Harry Potter movies. Being a successful investor is exceptionally difficult. It is important to be in a good mental state as much as possible. This will allow you to think and act in a more rational way over time.

 

It is rational to sell a stock when you become confident/convinced that you have made a mistake. And the sooner you act the better.

 

————-

 

The next two reasons you might want to sell a stock apply to businesses you have owned for years. Sometimes things change. Management. Fundamentals. Prospects. Industry. And what was once a good investment is no longer the case.

 

4.) Management disappoints/frustrates

 

Management is a critical part of the investing decision. That is because bad management can destroy shareholder value.

 

Fisher provides two general types of causes that might result in management messing up badly.

 

Perhaps the existing management team loses their way. Like Fairfax did from 2012 to 2018.

 

“Sometimes management deteriorates because success has affected one or more key executives. Smugness, complacency, or inertia replace the former drive and ingenuity.” Philip Fisher - Common Stocks and Uncommon Profits

 

Or the issue might happen after a leadership transition. Like perhaps what is happening with Markel today.

 

“More often it occurs because a new set of top executives do not measure up to the standard of performance set by their predecessors. Either they no longer hold to the policies that have made the company outstandingly successful, or they do not have the ability to continue to carry out such policies.”  Philip Fisher - Common Stocks and Uncommon Profits

 

When management messes up badly, it is generally best to sit things out. You can get back in after management demonstrates they have corrected their ways. Like Fairfax eventually did. We will see with Markel.

 

The next reason to sell is often tied at the hip with management.

 

————-

 

5.) When the economic characteristics/fundamentals of the business deteriorate in a meaningful way.

 

Very few businesses last forever - even the very good ones. Sometimes the issues are internal - the company loses out to competitors. Sometimes the issues are external - an entire industry gets disrupted. And its economics deteriorate over the years. Like what happened to newspapers.

 

The important thing is to monitor the situation and to stay open minded. When ‘the story’ takes a permanent turn for the worse then it makes sense to sell.

 

We can combine 4.) and 5.) together to make the following point. A few exceptional companies will be very good investments over the medium term. Even fewer companies will remain very good investments over the long term.

 

The next reason to sell is offensive in nature.

 

—————

 

6.) You find a much better opportunity.

 

Here is how Fisher put it:

 

“If the evidence is clear-cut and the investor feels quite sure of his ground, it will, even after paying capital gains taxes, probably pay him handsomely to switch into the situation with seemingly better

prospects.” Philip Fisher - Common Stocks and Uncommon Profits

 

This sounds easy. But this reason for selling a stock is full of potential pitfalls. And that is because of all the different assumptions that are involved in the decision (on both the sell and the buy sides) and the uncertainty it brings.

• What if the company you plan to sell is a better value than you think?
• What if the company you want to buy is not as good of a value as you think?

A variation of Peter Lynch’s observation:

 

Most importantly, you don’t want to cut your flowers and replace them by planting a bunch of weeds. Of course, investors don’t think they are doing this (when they swap an investment). But this is often what actually happens to investors and it is likely one of the big reasons their investment returns lag over time.

 

Selling a stock that you already own to buy a brand new stock should only happen when you have a high degree of certainty on all aspects of the decision.

 

—————

 

7.) The stock is trading at a premium to its intrinsic value.

 

This is the reason to sell a stock that was espoused by Ben Graham. Buy when a stock is cheap (margin of safety). Sell when a stock is no longer cheap. Rinse and repeat. Get rich.

 

The biggest strength of this framework is it is very easy to understand for retail investors. And it is also easy to teach.

 

It is important to remember: Graham’s goal was to come up with an investing framework that could easily be taught to the general public.

 

He was not trying to come up with an investing framework that would optimize results for sophisticated investors.

 

Here is the interesting thing. Fisher did not list this as a reason to sell.

 

Was this a mistake by Fisher? A reason he missed?

 

No. Fisher didn’t list this as a reason to sell because he was playing a completely different game than Graham was.

 

—————

 

Let’s flip the script.

 

Is there ever a situation when a stock should never be sold?

 

According to Fisher, the answer is yes.

 

Let’s explore this next. But we will move from the realm of the average retail investor to that of a sophisticated investor.

 

—————

 

Philip Fisher

 

There is a different way to play the investing game than the one that I outlined above. This method was first developed by Philip Fisher. And then picked up by none other than Warren Buffett/Charlie Munger.

 

What were some of important building blocks of Fisher’s investing framework?

• Only own high quality companies - determined primarily by qualitative factors (like management). Not determined primarily by quantitative factors. In many ways, Fisher’s approach is the opposite of Graham’s approach.
• Concentrate in the best ideas.
• Hold positions forever.

Fisher is unique in his sell strategy. That is what we want to focus on here.

 

Buy and hold forever

 

“If the job has been correctly done when a common stock is purchased, the time to sell it is—almost never.” Philip Fisher - Common Stocks and Uncommon Profits

 

This is, of course, one of the really important things Warren Buffett learned from Fisher. When you own an outstanding company you should never sell it. Even when it appears it might be overvalued.

 

Volatility and Mr Market

 

Fisher agreed with Graham that Mr Market was a manic depressive that should be exploited. But only to buy low.

 

When an investor sells a position when it is ‘no longer cheap’ they are now - perversely - allowing themselves to be exploited by Mr Market. They are getting tricked into selling a great company (who is likely to grow into an even bigger long term winner). Investors stop looking at their investment as a business - and they use price as their primary valuation tool.

 

John Train published ‘The Money Masters’ in 1980. He profiled 9 investors, including Philip Fisher. Below is how he summarized Philip Fisher’s thinking on ‘when to sell’:

 

“…if you have chosen the company properly in the first place, with a reasonable prospect that in ten years, say, the stock will have tripled or quadrupled, is it so important that it’s 35 percent overpriced today? And there’s always the possibility that the stock’s price reflects good news you don’t know about yet.

 

“Silliest of all, says Fisher, is selling out just because a stock has gone up a lot. The truly great company—the only kind he is interested in buying—will grow on and on, and its stock likewise. That it has advanced substantially since you bought it only means that everything is going just as it should.”

 

John Train (on Philip Fisher) - The Money Masters

 

—————

 

Warren Buffett (at the prodding of Charlie Munger) Embraces Fisher

 

As you can see from the above quote, Philip Fisher was playing a very different game than most other investors. Including most value investors. Buffett’s genius was not going ‘all in’ on Fisher’s methodology - but in using it for part of his investment portfolio.

 

When Buffett found an exceptional company - and he knew it - he held it for the long term. Decades. He might add to it on weakness. But he never sold it when it ran up in price. He didn’t sell it when it was ‘no longer cheap.’ He didn’t even sell it when it was obviously overvalued.

 

And Buffett has said that 12 decisions over 60 years is what separates his results from those of average investors (or one decision every 5 years). But what allowed these 12 decisions to become outstanding investments was what he learned from Fisher - it was his holding period of decades.

 

This approach is impossible for most investors to pull off. And that is because they are playing a completely different game. Fisher was content to get rich slow. Investors (throughout history) are focussed on getting rich as quickly as possible. As a result, Fisher’s approach is impossible for most investors to execute.

 

—————

 

What is my key takeaway from Philip Fisher?

 

I have no desire to try and become a 100% Philip Fisher type of investor. I don’t have the time, the desire or the skill to invest that way.

 

But like Buffett, i think I can become a 15% Philip Fisher type of investor. And that is because every 5 years or so, I have usually been able find one outstanding investment. Something I understand exceptionally well. Where my view of the business is different from ‘consensus’. Moving forward, when I find an outstanding business, I am going to try and get better at my sell discipline - and not be tempted to sell my position. When it gets fairly valued. And also when it appears that it might be overvalued.

 

Does this post have anything to do with Fairfax?

 

Yes. I think Fairfax might have blossomed over the past 5 years into one of those outstanding investments that Philip Fisher (and Warren Buffett) were always on the lookout for.

 

—————

 

One final word on the topic of selling from Peter Lynch

 

My biggest mistake was that I always sold stocks way too early. In fact, I got a call from Warren Buffett in 1989. My daughter picks up the phone and says, "It's Mr. Buffett on the line."

 

And I pick up the phone and I hear, "This is Warren Buffett from Omaha, Nebraska." You know, he talks so fast. "And I love your book, One Up On Wall Street, and I want to use a line from it in my year-end report. I have to have it. Can I please use it?

 

I said, "Sure. What's the line?" He says, "Selling your winners and holding your losers is like cutting the flowers and watering the weeds.”

That one line he picked up in my whole book has been my greatest mistake.

 

Peter Lynch - Forbes India, Collectors Edition - November 2017

 

Let’s go back to what Lynch said at the beginning of this post.

 

“I try to stick with them as long as the story’s intact.”

 

Doesn’t this sounds similar to Fisher’s approach when it came to selling?

@Viking excellent post.  There is one additional factor in determining when, or whether to sell a stock.  That is the optionality of the company to leverage its past and present success into future successful endeavors.  Companies that operate in narrow fields should almost always be sold if and when its industry or sector undergoes fundamental deterioration for any reason - even the best companies in a slowing or failing industry can't defy gravity.  Diversified companies that can transition from one industry, or even sub-sector to another are worthy of holding for a very long time as long as management is capable of handling change - like Berkshire and Microsoft just to name two.  Personally these are the only types of companies I care to own in size and since there aren't that many of them it makes investing in stocks a lot easier.    

[Maverick47]

1 hour ago, Viking said:

3.) If you made a mistake with your purchase.

 

Your understanding of a company will generally be at its lowest level when you make your first purchase of shares.

 

Mistakes will happen when investing. That is a given. It is best to figure this out quickly. And then act.

 

Sounds pretty simple… You made a mistake. You recognize you made a mistake.  You quickly correct the mistake. You are golden. That is what any rational investor would do.

 

So what’s the problem?

 

Ego. (Often the enemy of being rational.)

 

Ego stops you from recognizing that you made a mistake.

 

Mistakes usually result in losses. Most investors have a hard time selling stocks that are in a loss position. Instead, they wait for the stock to return to their purchase price - they will sell it then (they tell themselves). The problem is mistakes don’t usually return to an investors purchase price.

 

“None of us likes to admit to himself that he has been wrong. If we have made a mistake in buying a stock but can sell the stock at a small profit, we have somehow lost any sense of having been foolish. On the other hand, if we sell at a small loss we are quite unhappy about the whole matter. This reaction, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.” Philip Fisher - Common Stocks and Uncommon Profits

 

Holding on to mistakes then results in a second bigger problem.

 

The funds can’t be redeployed into a better opportunity.

 

“More money has probably been lost by investors holding a stock they really did not want until they could “at least come out even” than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous.” Philip Fisher - Common Stocks and Uncommon Profits

 

The bigger cost of holding on to mistakes is the opportunity cost. The financial cost can be massive - and only grows the longer the mistake is held. This is an example of compounding working in reverse. Good luck getting wealthy with a bunch of stocks like this in your portfolio.

 

There are two direct financial costs to making a mistake with your original purchase:

1. The decline in value of the mistake you continue to own.
2. The opportunity cost: What you could have earned if you had shifted the funds to a better opportunity.

Given enough time, the second ‘loss’ can be much bigger than the first.

 

There is another cost of holding on to mistakes - that is the significant psychological cost to the investor. These positions suck the life out of an investor over time - these positions are like the dementors in the Harry Potter movies. Being a successful investor is exceptionally difficult. It is important to be in a good mental state as much as possible. This will allow you to think and act in a more rational way over time.

 

It is rational to sell a stock when you become confident/convinced that you have made a mistake. And the sooner you act the better.

@VikingReally good comments about the importance of “cutting your weeds and watering your flowers”.  Buffett has said that “you don’t have to make money back the same way you lost it”.  I agree with you about the helpfulness of getting the mistakes off of your personal balance sheet.  And I firmly believe that Fairfax is not one of the weeds in my own portfolio.

 

I also appreciate what appears to be the ability of Fairfax to take advantage of global investment opportunities in a manner I could not hope to replicate on my own.  Just as we no longer think of Berkshire as a pure insurer, but as a conglomerate, I believe we’re seeing plenty of indications that Fairfax is following a similar path, which can add stability and diversification to its future income streams.

 

By the way, is it fair to say that their investment in Orla is cumulatively worth roughly $1 billion now? I used to stay away from mining investments, probably because I recalled Mark Twain’s rueful observation that “a mine is a hole in the ground with a liar on top”.  It certainly appears that Fairfax has invested in “a hole in the ground with gold at the bottom”.

[Viking]

19 minutes ago, Maverick47 said:

Just as we no longer think of Berkshire as a pure insurer, but as a conglomerate, I believe we’re seeing plenty of indications that Fairfax is following a similar path, which can add stability and diversification to its future income streams.

@Maverick47, my view is a number of factors have come together for Fairfax over the past 5 years that have resulted in a unique business model in P/C insurance. 
 

I don’t think it is the Berkshire Hathaway business model (conglomerate). 
 

Fairfax has built a unique platform. Their focus the past 10 years has been to aggressively grow their insurance business. Much more so that BRK ever has. As a result, Fairfax has been increasing the amount of leverage it has (to float) on a per share basis.
 

At the same time, the quality of their insurance business has improved dramatically. I just finished reading Mark Adee’s book, Once and Future Crum and Forster, and it provided more insight into the many improvements. 

• https://www.cfins.com/the-once-and-future-cf-landing/

At the same time, Fairfax has built out a wonderful investment management platform. It has spent decades building extensive capabilities. Venture capital (start-up) investor. Private equity investor (LBO light). International investor (India, Greece). Value investor. Sometimes they are planting acorns that are growing to oaks (to steal a metaphor from Mark Adee). Other times that are more tactical. 

They have a wonderful breadth of capabilities. 
 

At the same time, Fairfax has been building out its business/relationships with outstanding external capital allocators. This is having a big impact on deal flow - they are likely now getting many more juicy opportunities than they have the money for - a first class problem to have. 
 

Bottom line, Fairfax’s investment management business is much more diversified than Berkshire Hathaway has ever been. That also bodes well for longevity of its model - it is increasingly not reliant on any one person. 
 

The external environment has also changed in recent years. We have moved away from a zero interest rate world (with suppressed volatility). And we appear to moving into a higher inflation/interest rate regime (with higher volatility). The current external environment is ideally suited to Fairfax and their business model. 
 

When I put it all together, I think Fairfax is poised to perform exceptionally well over the next 5 years. I think a 15% ROE is a good baseline number to use (on average). I think this estimate has a margin of safety built into it.