Warren Buffett is one of most misquoted [in terms of context] investment gurus of our times.
What happens when we are given below advise ?
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
or
“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes”
We buy businesses and then hold them, thinking that Warren Buffet has recommended to hold our positions for long term. In fact one of most repeated quote I hear is
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
Trust me there are several businesses in India which if invested today and then magically the stocks markets shut down for 5 years, after 5 years you have to search the company and its promoters to get pennies back on the dollar invested.
Another chart that is thrown at me is this
Warren Buffett is holding Coke and American Express for 20+ years.
Honestly tell me how many Coke’s like business are their out in the world ?
There is only one (Pepsi is a distant cousin) In this game of buying businesses for long term we forget what Warren Buffet really meant
Emphasis Mine
“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
What is Corollary ?
When we don’t hold outstanding business we sell to book profits.
A Forbes article rightly pointed,
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Most importantly, while you may "beat the market" with "paper profits" in the short term, it is only the realization of those gains that generate "spendable wealth."
Let me tell you a personal story, In May 2014 I was working on an idea – Freshtrop Fruits, thanks to nudge by Ayush Mittal on dalal street. With European ban on Indian grapes lifted, I was convinced that company would benefit, So after some due diligence I bought the company in July 2014.
We were in middle of bull market, every stock was flying by night but Freshtrop was special it was galloping very soon it doubled and trebled.
I was patting my back, coincidentally I was re -reading a Buffett a lot (So much so that I did a 12 video series on Buffett partnership letters). I was convinced that I have found a moated company run by a decent management.[obviously this is me persuading myself]
By Jan 2015 my stomach started churning, the company was a 7-bagger in 6 months, a INR 240 crore m-cap for a company which earns about INR 8-9 crores annually with very seasonal business (though promoters were trying to de-risk that)
But I was in Buffett land and knew that meant moated stocks are not to be sold and be held for long term. However something caught my eye – poor corporate governance (This is deal breaker)
So I sold with management too, below was my investment operations leading to a 262% return. If I was rational I could have made 400% but madness gets you and then you ignore stomach churns.
What do we learn from this post ?
Don't buy and forget
As the article in Zero hedge points
Most investors do fairly well at "buying" but stink at "selling." The reason is purely emotional driven primarily by "greed" and "fear." Like pruning and weeding a garden; a solid discipline of regularly taking profits, selling laggards and rebalancing the allocation leads to a healthier portfolio over time.
Always read Gurus with a context filter, world is prone to survivorship bias and if you don’t apply right filters you will not be a survivor in financial markets.
PS – I am Buffett aficionado and for uninitiated reading Buffett even out of context would do more good than harm ;)