Issue No. 23: Doubling Down, A First Glance at Hemnet
Buy more, do nothing, sell some, dump it all? A tidy little business in the Nordics...
‘The analysis is the easy part. I tell business school students that investing is the intersection of economics and psychology. Valuation is not that hard. The psychology - How much do I buy? Do you buy at this price? Do you wait for a lower price? What do you do when it looks like the world might end? Those things are harder and knowing whether you stand there, buy more, or if you need to do something because things have legitimately gone wrong - those are harder decisions to make.
Seth Klarman, interviewed by Charlie Rose
I’ve heard of many, many different approaches to portfolio construction. My experience is that people gravitate toward a certain philosophy over time - something that makes sense to them. Perhaps it would be more apt to say that most people adopt an approach that makes sense to them emotionally. No matter what your strategy is, if you can’t see it through, it’s an exercise in futility.
My personal philosophy:
‘Once you’re in the business of evaluating businesses, and you decide that you are going to bring the effort and intensity and time involved to get that job done, than I think diversification to any degree is a mistake. I got asked that question when I was at Sun Trust the other day, and if you really know businesses, you probably shouldn’t own more than 6 of them. If you can identify 6 wonderful businesses that is all the diversification you’re going to need and you’re going to make a lot of money - and I’ll guarantee you that going into a 7th one is going to, rather than putting money into your first one, be a terrible mistake. Very few people have gotten rich on their 7th best idea - but a lot of people have gotten rich on their best idea. I’d probably have half in what I liked best.’
Warren Buffett
Within the confines of any person’s strategy, the question of what to do when market’s move against your positions has been plaguing my thoughts of late. Of course, this year hasn’t been a time for these questions generally. When stocks behave so well, you don’t find yourself having dark nights of the soul.
Last year was, however, a much more conducive environment for such introspection. Generally, commitment and consistency bias and denial reigns supreme (and haven’t I experienced that). There were several examples of investors holding tightly onto stocks that had cratered 90% (or more). Quite often these declines were based on a general degradation of the company’s financial position and operating performance - a certain used vehicle vending machine company comes to mind. Many investor letters stopped finding public distribution, Twitter accounts were locked, and many investors were left with ‘answers answerless’.
So, what to do?
Benjamin Graham, in his seminal work, stated:
What’s needed is, first, a definite rule for purchasing which indicates a priori that you’re acquiring stocks for less than they’re worth. Second, you have to operate with a large enough number of stocks to make the approach effective. And finally you need a very definite guideline for selling.
Rules, ex ante, are important. They will also be different for individual investors:
There is a residual problem that you have to know [about investing] that even the Graham and Dodd approach won’t save you from. Which is: when you sell these stocks, you have to pick a price. If you can’t put a price on them precisely [often the case for companies which are growing their earnings power in a compounded fashion] you can’t do a very good sell decision. What’s Buffett’s sell decision? He never sells. It’s pretty stupid in some cases. What’s Klarman’s rule? He never pays above 20x earnings. It’s really stupid in some cases BUT you gotta have a rule.
My person proclivity is to force rank the portfolio based on quality, defined as low absolute business risk and high earnings power growth. My personal sell discipline would be based around a degradation of said quality, not necessarily price. Sometimes it has made me look pretty stupid - I’m happy to admit (I’ve sold Meta Platforms at more than half it’s current price and Alphabet earlier this year). As Greenwald says, ‘you’ve gotta have a rule’.
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