How to Stay a Value Investor When It’s Time to Sell

During their recent episode, Taylor, Carlisle, and Whit Huguley discussed How to Stay a Value Investor When It’s Time to Sell. Here’s an excerpt from the episode:

Whit: Yeah, we just weren’t thinking about that. And it’s something I’ve been thinking about a lot recently. The one pushback I’ve heard on buying back shares in micro-cap and small-cap areas is that the volume is too low and it’s hard to buy back shares. And for the first year or two of running River Oaks Capital, I was somewhat in that camp and I understood the argument. But about two years ago, we bought ownership in this company called Medical Facilities and over two years they bought back 40% of their shares. It’s under $200 million market cap company and it’s listed on the Canadian Stock Exchange, which has pretty restrictive– you can only buy back 25% of the volume per day. They did do a tender offer, but they’re on pace from just buying back 25% of the volume per day to buy back 15% of the company this year. So, I think good management teams find a way to buy back shares, especially if it’s at five to seven times earnings. And I think the way–

When I’m reaching out to companies that we have ownership in, the way I phrase it is that if you were to issue a press release that today we bought 10% ownership in another business at a five PE ratio, I think the market or investors would love that announcement. But for some reason, they’re missing out on the opportunity to buy 10% ownership in their own business at a five PE ratio. And I don’t think there’s any difference in the two. In fact, it’s probably better because you know your business better than the business you’re acquiring.

And I think the second reason investors shouldn’t get mad about it is from switching, there are plenty of advantages of being a private company, but one of the biggest advantages of being a public investor is that you can average down your cost basis without anything materially bad happening to the company, which is another reason not to get mad about the share price being below fair value.

For instance, I own a company where a family owns 30% of the company. There was a family dynamic and half the company– So, they split the shares up amongst the family, and half the family decided one day they were going to sell all their shares. So, the stock went down 30%. And because I had done due diligence, visited the management team, knew the company well, I knew nothing material had changed in the company at all. So now, I was just able to buy ownership at 30% below where I was buying it at.

In the private markets, I don’t think you’re offered that opportunity very often. If you are averaging down “30%,” it’s because something materially wrong has happened in the company. It sounds silly to say out loud, but I really do think having an inefficient share price or a share price of fair value is a net positive for a business-minded long-term investor.

The other thing I was thinking about that I think you said one episode, Jake, Value: After Hours, and this isn’t a direct quote. So, I apologize if I’m misquoting you here, but you said “A time to consider selling is once you get the return you deserve, or somewhere around there.” And the way I interpreted it, and I’m going to tie this back to the “low share price is good,” is that if you’re going to be a value investor while buying remain a value investor, while selling don’t turn into a growth investor when you’re selling. And I think the example you gave was Fairfax, how Fairfax has always remained around book value. So, it’s only ever grown at how much book value has grown. So, it hasn’t tempted you to sell at above or quickly sell, I guess. And it kind of has turned you into– Or has made the journey easy of being a long-term, business-minded investor. So, that’s another thing I’ve been thinking about of the positives of the share price being below intrinsic value. So, yeah, we would love to–

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