Never-Sell Done Right | The Acquirer's Multiple®

During their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discuss Never-Sell Done Right. Here’s an excerpt from the episode:

Tobias: My topic today is, I’m going to talk about that a little bit– There’s been a few tweets and papers around recently that show that if you had just held the top names in the S&P 500 and not reconstituted the index, you just hold them and you don’t sell, it seems that you’ve done better-

Jake: Really?

Tobias: -over time than following the index. Yeah. And possibly at lower risk too.

Jake: I got to hear the methodology behind this before I guess I could–

Tobias: One is a Jeremy Siegel article, and then I just saw a tweet that talked about the experience over the last 10 years. But then there’s also, on top of that, Sleepwell had a nice article today about the– I’m going to forget which one it is now, Ted or Todd. Todd, I think. When he wound up his partnership in 2011 to join Berkshire, he just said, “Hold these names.” [crosstalk]

Jake: That’s how [crosstalk] Ted move.

Tobias: I like that idea of– [crosstalk]

Jake: Tad?

[laughter]

Tobias: Yeah, I’m just going to say that. You just go backwards and figure out who it is. I think there’s something to be said for that. I know this is a little bit sacrilegious, but I actually think there’s something to be said for never sell, if it’s implemented in the right way. Because I think that when I’ve done those little research projects where I go back and look at, if instead of selling, you just hold it. You end up at the end of the period whatever you are– I’ve looked at it over about the last 25 years.

The things that work are the things that become massive parts of your portfolio. And the things that don’t work basically dwindle to nothing. This is assuming you’re just doing an equal weight by 30 names each rebalance state and you just hold onto them. And you’re rebuying some names over and over again. Some names you buy once, you just never hear from them again. But you end up at the end of this period with this portfolio that looks like this kind of Kelly weighted into all of the most successful, most popular names in the market.

Jake: Yeah. Look at your conviction on holding that giant winner. You’re a genius.

Tobias: There’s no tax consequences.

Bill: If you’re trying to live off that portfolio, I think you want to throw in some stuff. Compound, shoutout to you. I know you’re listening. He was telling me today, some of these mortgage REITs that flip to floating, they’re trading at 10%, 11% dividend yields. You got EPD that will give you 8%. God forbid, you own some cigarette companies that give you 8%. Some of those shipping leases. You need something that’s bringing cash into you to give you the ability to rebalance. I think that’s part of the insurance genius, except that is a better working capital cycle.

Tobias: That’s fair. But the way that I’m selecting these things just say you’re buying on the cheapest free cash flow multiple that you can. So, it’s just like it’s a free cash flow screen. You just buy all the cheapest stuff on a free cash flow screen, not worrying too much about the return on invested capital. Because you’re getting so much cash flow for what you’re paying, over a short period of time, a huge amount of cash flow is returned to you. So, over five years, a third of your portfolio comes back in cash. That’s the average across the many, many portfolios that I form on a rolling basis. So, that is– [crosstalk]

Jake: Does that count stuff that gets bought out, stuff that’s–? [crosstalk]

Tobias: A lot of stuff gets bought out, because competitors are picking off stuff that’s too good. A lot of stuff just returns capital, because it’s got too much cash and it’s cheap relative to– can buy back stock. So, the end of it is that you’re having to redeploy a third of your capital every five years and then that sort of snowballs as well. So, you’re redeploying quite a lot of capital, even though you’re not selling.

Jake: Yeah, natural turnover.

Bill: How do you assume that you’re rebuying, the same amount all the time?

Tobias: No.

Bill: You just start to recycle the capital that you have gotten back, and then are you selling proportionately into buybacks. If they have buybacks, do you assume that’s like return–? [crosstalk]

Tobias: You just holding onto your stock. You’re just holding onto your stock.

Bill: Huh, interesting.

Jake: Just concentrating on the precious.

Tobias: I like it as a strategy. I’m trying to find some way to deploy it into something, but I haven’t got that far yet. I’m still thinking through it. But I just keep an eye out for these articles where people say-

Jake: Sounds a bit like invincible.

Tobias: -not rebalancing, that’s interesting.

Jake: Yeah.

Tobias: Yeah, that would be the idea. Something like that.

Tobias: It sounds like an ETF with the ticker, HODL.

Tobias: Yeah, actually, that’s great. Does that exist?

Bill: It should.

Tobias: ETF, it’s a good one.

Bill: Yeah, people, they would be really [Tobias laughs] surprised if they found out that HODL is not bitcoin.

Tobias: Maybe trail.

Tobias and Jake: Yeah.

Jake: How are you going to write a book around that either? That’s what I’m trying to figure out.

Bill: There’s ways.

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