In this interview with William Green, Guy Spier discusses the challenge of deciding whether to trim investments when the valuation of a position has greatly appreciated. Here’s an excerpt from the interview:
Spier: In the Berkshire case we can take the example of Coca-Cola, where that investment has been held through an enormous period of time.
But there was a period where Coca-Cola got to an evaluation of 40 or 50 times earnings, and then a few years later when the company’s share prices come down significantly, Warren confesses to the annual general meeting that it was probably a mistake to hold on to it. And you should have sold it.
We all know the example of Nick Sleep and Amazon, but there’s an interesting history that perhaps could be written there. Where in your book you describe how at a certain point Nick took half his money off the table, while I think Zach left his money on the table – two divergent paths.
Which one was the right one?
So it’s really, really hard when you have… so in both of those cases BYD and India Energy Exchange, the position has appreciated enormously in the portfolio.
They’re worth multiples of the original investment.
So, the question arises when you see the valuation get ahead of itself when perhaps risks on the horizon, at least in near-term earnings, are loomed greater relative to the valuation.
Should you trim or not?
On one side, you have Charlie Munger who says, “It’s hard enough to buy a good business once, let alone twice. Don’t water the weeds and trim the roses.”
Hold on to them, be the guy who was Berkshire Hathaway until that moment when it really was very, very highly valued. And more in regret selling, or Amazon where, until recent history, the thing to do was to hold on. That’s clearly one aspect.
You can watch the entire discussion here:
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