Compounding Life

Recently two stocks I sold have had been on a tear. I sold Value Vision (VVTV) and IGO (IGOI) for some pretty substantial gains. I sold IGOI for a %120 gain after holding it for 5 months in a tax deferred account. I unwound VVTV in lots ranging from %870 to %300 gains in taxable and tax deferred accounts. The proceeds were re-invested in other positions which have performed well but in the short term I left some money on the table by not keeping the positions I had. Keyword here being short term.

I spend a lot of time thinking about my actions trying to determine if I made the right or wrong decision and if I made wrong decision, what lesson I need to take from the experience to apply to future endeavors. So of course one of the questions I asked myself is did I sell too early?

One thing I try to remind myself of in situations like this is “What the market does after you open or close a position really has no bearing on the quality of your decision.” While I would like to take credit for that thought, I imagine it was probably inspired by something I read from someone much wiser and with more experience under their belt. In essence what I am trying to say is that especially in the short term you should not use the market to judge your decisions. Even though the market values VVTV at over $7 and IGOI at over $4, that is not an indication on the quality of my decision to sell at cheaper prices.

Why? The answer really boils down to my investment philosophy. I started investing because I felt I strongly identified with the value investing framework. It makes sense to me and I feel confident that if applied with discipline it can lead to superior performance. While there are many interpretations of the value investing framework, one of the core tenets of value investing is the “Margin of Safety”. Buffett’s early investment style was influenced by his mentor Ben Graham. His style today is probably influenced by many people, two of which are Phil Fisher and his long time partner at Berkshire Charlie Munger. As his style has evolved the margin of safety is still a key component.

I entered both of these positions because I felt they provided adequate margins of safety trading at good discounts to their liquidation value and in both cases the companies had the chance turn around their business as an ongoing concern. So far they have both been making good progress and the market is treating them nicely for that progress. However lets not forget that these are not fantastic businesses with strong moats. So in my case, I bought them at discount to their value dead and got a premium because things worked out well. If only all situations could work out that way!

Both of these companies have a chance of success however once the margin of safety is gone there is nothing to backstop the value. Both of these companies have to execute with little or no error to continue on the upward path they are on. In this case the value the market puts on their progress is of no concern to me, what is of concern is the companies strength and the margin of safety I have if I hold.

Buffett has said that the best businesses are ones that can be run by a ham sandwich, because someday a ham sandwich will run them. I did not enter these positions because of their great business, I entered them because the market was selling them a large discount. They were Graham style cigar butts.

In the event that they enjoy great success long term the shares will appreciate accordingly, however in the event that they fail there is a higher risk of capital loss than I am comfortable with. Unlike companies with strong moats they can’t afford to make mistakes for a year or two. They must do a lot of things right.

So in conclusion when thinking about selling stocks do not think about the market. Think about the business and the margin of safety it offers at its current price. If you do that you will probably be right more often than you are wrong.

Disclosure: No positions in the stocks mentioned in this article.

I attended the Berkshire Hathaway annual meeting this year, at the meeting you get to hear Warren and Charlie (mostly Warren) answer questions for about 5 hours. The Monday after was the Wesco Financial annual meeting which is all Charlie’s show. I didn’t attend but the Motley Fool has some good notes in this article.

Charlie Munger is a wealth of knowledge and thought. As a lot of people say, he doesn’t talk very much but when he does listen up.

Disclosure: I own shares of WFC and BRK.B at the time of this writing.

Lately I have been reading the quarterly and annual reports from the “Oak Value Fund”. Not because I am interested in investing in their fund but because they are well written reports that summarize the market weather from the perspective of a value investor and they go into good details about their holdings and their reasons for buying or selling their positions.  

The Oak Value reports are reminiscent of the Berkshire Hathaway annual letter to shareholders but offer yet another perspective because they do not buy entire companies and they will open and close positions more often.

I reiterate, I have no intentions of investing in this fund nor do I make any recommendation that any one else does. I just feel there is some good reading in their reports.  One interesting note is that OAKVX is a fairly small fund with only around 58 million is assets.

Got a tweet from DividendStocks ( website link ) about a dividend increase post on Seeking Alpha. One of the companies increasing their dividend is Wesco Financial  (WSC). WSC is run by Charlie Munger and 80% is of the stock is owned by Berkshire Hathaway.  I have a small position in WSC and while the dividend increase of 1 cent from 0.385 to 0.395 is not very much it is still signifigant because WSC has consistently increased their dividend payment for 37 years.  As the Seeking Alpha article states:

Wesco Financial Corporation is a dividend champion and an achiever

Some people consider WSC to be a mini-BRK but Charlie states his own thoughts on that subject in the 2007 annual letter:

 

Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway.Wesco is not an equally-goodbut-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the quality disparity in book value’s intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway.

All that said, we make no attempt to appraise relative attractiveness for investment of Wesco versus Berkshire Hathaway stock at present stock-market quotations.

One interesting thing to note is that from a value perspective WSC is trading at a discount to its cash and book value. Considering who is at the helm I think you can trust their accounting  practices and valuations a lot more than most. 

On a slightly humorous note it looks Wesco and Berkshire do share the same web designer

I am unabashed fan of Warren Buffett and I really enjoyed watching this video of him speaking to a MBA class at University of Florida.  Its a little over an hour but its time well spent.  

The video is from 2000, but like all of his advice its timeless. One the things mentioned in the talk that really stuck out in my mind is the following in reference to the failure of Long Term Capital:

 

 

To make money they didnt have and didnt need they risked what they did have and what they did need.

 

He goes on to make an example with someone who has 100 million dollars. If this person can earn 10% a year on his 100 million dollars without leverage at almost no risk, or take some risk and leverage his 100 million dollars to make a 20% return this person would be crazy to risk losing their 100 million for an additional 10%. Especially because they already have 100 million bucks, how is the additional 10% going to make their life that much better? It isn’t it. But the downside if they loose is obvious, they no longer have any money.

The google video link above is for the whole 1 hour talk, its also on youtube broken up in smaller chunks.

Other Warren Buffett videos:

Warren Buffett talks Business

Charlie Rose Interview