Holding Stocks Is A Superpower! | The Acquirer's Multiple®

During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed why Holding Stocks Is A Superpower! Here’s an excerpt from the episode:

Bill Brewster:
Russo released his letter to shareholders, and I got looking at some of the positions. You just look through like MasterCard, his cost base is 7.9 billion, current market value 93.5 billion. Berkshire 17.6 billion-

Jake Taylor:
Wait, how much money is he managing?

Bill Brewster:
On 628 million, so it’s a 15% position now.

Jake Taylor:
Okay.

Tobias Carlisle:
That was the market cap when he stuck it in, not the size of his position.

Jake Taylor:
Yeah, that’s about how much he… Yeah.

Bill Brewster:
Yeah, total cost and market value today. His total cost on Berkshire is 17.6 million, current market value, 84.6 million. Nestle cost base is 13.5 million, current value, 80.7 million. If you look at the aggregate gains in his portfolio, they are just under 300 million, it looks like. No, sorry total gains 363 million. Of that, 210 million looks like it’s the top three positions. So, it’s just one of those. I think it’s really… I mean, and then is Comcast position stupid, if these numbers are correct, which I assume they are, on a $373,000 position, it’s up to 12 million, 12.7 million. So it’s just-

Jake Taylor:
He should have bought more.

Bill Brewster:
Yeah. I’m shocked he never averaged up. So, it’s just one of those interesting peeks at if you just let your winners run what it can do. I mean, it’s a, it’s almost an argument for a coffee camp portfolio or something like that. This goes back to, I think I mentioned this before, but Greenblatt has mentioned that when he ran a concentrated fund, he found that letting winners run was as hard.

Tobias Carlisle:
This is a special situations portfolio?

Bill Brewster:
Yeah, back when he was running like six things. He said it was mentally just as difficult to let winners run as to have losers.

Tobias Carlisle:
I would have thought special situations had a pretty, you got a pretty hard catalyst. You know what are you going to get paid when you get the money back, that’s it. It’s played out. He’s letting those run?

Bill Brewster:
I don’t really know exactly what he was talking about, but I do know-

Jake Taylor:
It could be more spinoffs too.

Bill Brewster:
Yeah, not have-

Tobias Carlisle:
That’s fair.

Bill Brewster:
The other thing is, I don’t know if you think you have a 4:1 upside and you’re at 3:1 and it’s 25% of your book, letting it eke out that last part of the run could be really difficult.

Jake Taylor:
Returns per decision is an interesting metric to think about, and Russo’s got a pretty high score on that one.

Bill Brewster:
Yeah.

Tobias Carlisle:
Per position or per decision?

Jake Taylor:
Per decision.

Tobias Carlisle:
So, does that mean if it goes down and I buy a little bit more, have I made two decisions there, the initial purchase and the re-upping?

Jake Taylor:
I mean, probably technically yes, but that’s a half of decision. I don’t know. How do you guys measure that?

Tobias Carlisle:
I want the technical. I want you to be technically correct about this JT. I need to be able to code it into my system.

Jake Taylor:
Technically correct, and directionally wrong.

Tobias Carlisle:
It’s the best kind of correct.

Bill Brewster:
I think even if it is too, you’re not buying and selling and buying another security. I mean, he is very good at fishing in the pond that he understands and letting his oaks grow.

Tobias Carlisle:
Does he trim?

Bill Brewster:
He does. Well, I asked him or John, I’m pretty sure I submitted that question, John Mahalcovich asked him that at The Manual of Ideas presentation and I’m pretty sure he said that he views that as cutting your flowers and watering your weeds, and he doesn’t like to do that.

Tobias Carlisle:
Because the problem is that, you get a position that you like, I don’t know what you put into it, 5 or 10%, maybe more at inception. It goes really well. You’re up to, it could be 30 to 50% of your book. At that point that it’s run so far relative to the rest of your book, it’s much, much riskier now than it was when it was a much smaller position, because there’s more speculation in the price than there is… This is assuming that the value hasn’t run as hard, maybe the value has for him. I think it’s hard to then say, well now this is a 50% position and it’s more expensive. It makes total sense to me to keep it as a 50% position. You don’t want to trim it back a little at that point?

Bill Brewster:
I mean, I think that this is where my perception as Tom Gayner would let it run. I think this is where Buffet and Munger would probably say you let it run. I think that’s the thing that’s pretty tough, right?

Jake Taylor:
Coke.

Bill Brewster:
Yeah.

Jake Taylor:
That was maybe not good letting it run.

Bill Brewster:
Well, but I mean, you can’t… When you get to that size, you can’t sell in and out of a business like that. So, you’re going to pay the taxes and you’ve got to figure out where to redeploy it. That’s a different issue I think.

Tobias Carlisle:
But, you could… Sorry.

Jake Taylor:
I did a little study at one point on looking at different quantitative value, it is nothing is as in depth as Toby’s done with all of his different books, which you should pick up and read. But, one hypothesis… So, I looked at that and I compared it to all of the gurus that you can find their track records. I looked at, over the same time periods, how did the studies perform relative to the gurus? Of course, the gurus trounced the market, but the studies actually trounced the gurus. One hypothesis, and obviously there’s some liquidity problems with some of these studies. It’d be really hard to actually execute it. But, one of the hypotheses I had for that was that, the studies, because they were mechanical in nature of buying and selling, that they would participate on the downside inefficiency by buying something that was cheap, but they could also participate on some upside inefficiency when it got over, when a guru might’ve sold out and out on some of the runs to the upside there. So, maybe there was this extra headroom that the machine was capturing that the human wouldn’t.

Tobias Carlisle:
Why didn’t the machine sell? Because it was on a rebalancing rather than-

Jake Taylor:
It was on a rebalance, yeah. It was like every two years it would rebalance, but it had already run up to past where maybe a guru would have sold it.

Tobias Carlisle:
I’m a big believer in value names becoming momentum names, and you lose some of the return if you sell them too early. So, Graham says you hold for a 50% gain or two years, whichever comes first. That’s actually not really good advice. That’s bad advice if you test it. Because, the 50% gain means you’re truncating anything that actually starts working. You’re much better off ignoring that one. The two year one is fine. That’s how you get pretty good returns. If you hold for more than a year you get… Because, there’s a lot of stuff that just doesn’t work out of the gate, just stumbles. What are the chances that you get this thing at a slope? Pretty small, right? You’re getting it in the trouble that it’s having.

Tobias Carlisle:
Then, it takes a little while. It takes a few quarters for it to work out and you could chop it out anytime through there, because it doesn’t quite meet your criteria. But, if you let it run for two years, often they do turn around and then you get a lot of the gain, but just by nature, by virtue of the fact that moves are exponential for securities. A lot of the gain happens in the last few quarters of a year. So, it’s worth holding for longer. That’s an argument for holding I guess. That’s a strong argument for holding.

Bill Brewster:
Yeah. Well, Munger has said they will hold securities at prices that they won’t buy them. Hat tip to my man, the science of hitting investing. We were just talking about that yesterday.

Tobias Carlisle:
That’s a great one.

Bill Brewster:
And Akre too, right? I mean, that’s the essence of what he had written. I think the sound reasoning that I have heard about that or thought about is, it’s hard enough to make one good buy decision. So, if you hold something that’s a little rich and you’re really trying to own a business for the longterm, who cares if you take a little bit of a draw down on an inflated price quote, that’s not the end of the world.

Tobias Carlisle:
Particularly if the underlying business is still going well. So, that’s the thing you have to be careful to distinguish between-

Bill Brewster:
Yeah.

Tobias Carlisle:
… If you’re buying cyclicals-

Jake Taylor:
Yeah, you have to have that right.

Tobias Carlisle:
… You’ve got to buy and sell cyclicals. But if you’ve got a really good business that is a compound, that does pay you to hold it for a long time, they’re just hard to pick.

Jake Taylor:
No, they’re not apparently. Everyone’s got a whole list of them.

Tobias Carlisle:
Was that, was that Gayner, or Russo? Which Tom was that?

Bill Brewster:
That I just talked about?

Tobias Carlisle:
Yeah.

Bill Brewster:
It was Russo.

Tobias Carlisle:
Okay, I thought you said Gayner at one stage.

Bill Brewster:
I think gainer is good. I think he’s good at picking a horse and riding the horse and buying it over time. Well, buying it over time and measuring. As I listened to him more and more, I think that’s probably like, if he has a super power, that’s what it is.

Tobias Carlisle:
Good comment here. That was Walter Shaw’s his biggest error, which he admitted not holding long enough. Good one to avoid there. There’s a good podcast with Tom Russo and Meb Faber, where Russo gets right into his process. I enjoyed that one, [crosstalk 00:12:15].

Bill Brewster:
His letters are crazy. They’re super in depth, which I think some of it he’s probably just writing to clear his head, which we all do, right?

Tobias Carlisle:
Yeah, that’s why you do it. Buffet says that too. He doesn’t know what he thinks until he writes it down.

Jake Taylor:
That is, boy amen to that one.

Tobias Carlisle:
Sometimes you’ve got to… You can believe it to yourself and then you try and justify it to someone else and you see all the errors that you’re making. Lucky that one didn’t get out into the wild, I’d better strangle that one on the cot.

Jake Taylor:
Well, that’s the great thing about being such a reasonable creature though. You can come up with all kinds of reasons to justify what-

Tobias Carlisle:
Is that Franklin?

Jake Taylor:
At Excel, yeah.

Tobias Carlisle:
That’s a great line. I had that pinned above my desk for a long time.

Bill Brewster:
Ironically, most of the things that I have owned that have gone really well, I have not written up publicly. If you scan my blog, you probably think I’m the worst investor ever invented, because it’s basically airlines and ABM Bev, which sucks.

Jake Taylor:
Nailed it.

Bill Brewster:
Yeah, great job, which is honestly part of the reason I haven’t written again. I probably just need to get back on the horse, but part of me is like, “Man, once I make these things public, it’s just destined to die.” So, maybe I don’t-

Tobias Carlisle:
Well, that’s true. That’s right. You’ve got that consistency bias. When you say something publicly, you feel like you’ve got to justify it. It’s better to develop a reputation for being really inconsistent. Then, that’s what you got. You’ve got to maintain that. He’s just really erratic, mercurial, changes his mind at the drop of a hat. That’s the great thing about Soros, right? He says, “I get a sore back and I change my mind.” That’s a good… “Why are you changing your position?” “I’ve got an ache in my back.” They’re like, “Okay.”

Jake Taylor:
Isn’t that how you get a lot of action at the poker table too, is people think that you’re a loose player.

Tobias Carlisle:
Yeah, loose aggressive. That has been, I don’t know if it still is, but when I was watching a lot of it, that was the way to play.

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