Thursday, January 26, 2017

The Art of Holding: Ian Cassell


Stocks rarely perform in the time frames we predict, and it’s why the market only works for investors that have a long-term portfolio focus. Performance is never linear, up and to the right, year after year. You sometimes have to hold onto a position for a few years before it goes up 100% in 3 months.
“I’m accustomed to hanging around with a stock when the price is going nowhere. Most of the money I make is in the third or fourth year that I’ve owned something.” – Peter Lynch
Here is a real-life example: I started buying a company I own today in early 2012 when it was at $0.35-0.40 per share. As my conviction grew I bought more and by mid- 2014 the stock hit $2.00 per share. Today (January 2017), the stock is still at $2.00 per share. Yes, I’m up considerably from my average cost basis but this company has been dead money for 2.5 years. Years!
How do I know if I’m right in holding versus just being entrenched in endowment bias?
Let’s get back to some first principles. Sustainable multi-baggers have three characteristics: Long-term revenue and earnings growth with little to no dilution. When you are holding onto a position ask yourself – Is this business growing and making more money per share than it did a year ago, two years ago? In my real-life example above the company’s business is almost double the size it was 2.5 years ago. Yes, the stock hasn’t gone anywhere but the business is doing really well. I have no problem holding this stock. If the business wasn’t performing, I would sell.  Successful investors can differentiate business performance from stock performance and can take advantage of those investors who can’t.
“I don’t want to spend my time trying to earn a lot of little profits. I want very, very big profits that I’m ready to wait for.” – Phil Fisher
In the book, The Art of Execution, portfolio manager Lee Freeman-Shor invests $25-$150 million ($1+ billion total) in 45 of the world’s top investors. His instructions to them were simple as there was just one rule. They could only invest in their ten best ideas to make money. Over several years he tracked their positions, trades, performance and was amazed at what he saw. He identified both good and bad habits and divided the investors into groups – Rabbits, Assassins, Hunters, Raiders, and the most successful group, the Connoisseurs.
“The most successful investors I worked with, those who made the most money, all had one thing in common: the presence of a couple of big winners in their portfolios. Any approach that does not embrace the possibility of winning big is doomed.” – The Art of Execution
In this excerpt, Lee Freeman-Shor talks about one of the attributes of Connoisseurs.
“One of the key requirements of staying invested in a big winner is to have (or cultivate) a high boredom threshold.
Meeting some of my Connoisseurs could be very, very boring because nothing ever changed. They would talk about the same stocks they had been invested in for the past five years or longer. On the days I had a meeting scheduled with a Connoisseur, I sometimes struggled to get out of bed.
The fact is, most of us will find it difficult to emulate the Connoisseurs because we feel the need to do something when we get to the office (or home trading desk) every day. We look at stock price charts, listen to the latest market news on Bloomberg TV, and fool ourselves into believing we could add value from making a few small trades here and there. It is very hard to do nothing but focus on the same handful of companies every year; only researching new ideas on the side.
Many of us, seeing we have made a profit of 40% in one of our stocks, start actively looking for another company to invest the money into – instead of leaving it invested. This is precisely why lots of investors never become very successful.”
Every multi-bagger will have long periods (even years) of stagnation as fundamentals backfill, old shareholders get bored, and new shareholders enter. Just like a fine wine, sustainable multi-baggers often times take their time to ascend and develop. If you’re invested in great businesses that continue to grow and earn more money, don’t let lulls in stock price and boredom scare you out of them.

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