Why sitting on your ass works in Investing

In my last month’s newsletter, I briefly touched upon deliberating on idea of selling and not holding stocks at over stretched valuation

Charlie Munger says ,

Investing is where you find a few great companies and then sit on your ass

Fisher famously stated that

the time to sell a stock is almost never if the right kind of company is purchased after extensive research and analysis

Another theory could be that I am operating under disposition effect i.e. instead of looking at the overall portfolio performance, I am looking to gain from every stock. This narrow framing leads to selling winners and holding onto losers, I partially mitigated this by always looking for performance at portfolio level rather than at individual level

Also, it’s painful to sell winners too early. If they really skyrocket

See how some of our exited positions have sky rocketed in this bull run

Sitting-1

My investing philosophy is also evolving, I liked what Buffet wrote in 1967 letter

sitting-2

My logic was that for a small portfolio, this is the best way to gain size, i.e. buy things at attractive prices and then resell them when price catches up and keep doing this till portfolio attains a reasonable size, I was also not bothered to extract the maximum juice out of a given position again going by what Buffet wrote in 1963 letter

sitting-3

So is above right approach ? or One should sit on his ass and do nothing, if in model portfolio we did nothing we would have made better returns than selling and then entering new position (if I take short term capital gains into account)

See below (prices noon 10/08/2015)

Sitting-4
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So sitting on ass strategy works, but I am cautious of blindly following Munger, Re read what he said

Find a few great companies and then sit on your ass

Munger is one of the greatest investor of our times, for someone like me it’s difficult, very difficult to find great small companies and many a times I can err (that’s my reason to diversify) and I have erred many a times in past

Another reason that led me to sell is the raging bull market where price valuation gap catch up has been very fast, see Symphony or Tata elxsi in first table, this will not happen in a normal market scenario

Also look at the kind of companies which Buffet has held for longest

sitting-5

Above are iconic compounding machines and not all companies fit this category

So what is conclusion ?

Should we hold through temporary over valuation or sell and divert money in new opportunities ?

Opinions are divided and practitioners of both schools of thoughts have done well

For me

I will sell if I have a better opportunity to deploy cash, however I have learnt that I should stagger my selling. Please understand that there is no holy grail in investing so try and see what works for you

So what works for you ? share in comments

 

7 comments

  1. Nishanth says:

    Would we not have regretted if we had sold HDFC Bank , Asian Paints or Nestle due to temporary overvaluation.? For proven quality compounding machines , just sit on your ass. For all the other businesses, if they are drastically overvalued and you have a better opportunity ( another stock or sitting in cash in a raging bull market). Else , hold if your outlook for the business is still promising

    • Vivek Bothra says:

      Very difficult for someone to predict whether La opala could be next Asian paints, that’s the difficult my friend so for a small portfolio I would still sell La opala and invest in better opportunity if they are available if no then by selling I am diluting return
      Hope the process makes sense!

  2. Volca says:

    Investing world and its philosophies are many. Reading them all, helps to form a perspective and real learning will happen only on hindsight otherwise :). I prefer to view a stock which could give 3-4X in 4 years, if it happens within the time frame – I just take out the capital alone and leave the rest intact forever, with a 15 yr timeframe for sure.

    I mix value/growth/dividend/ethical management/speculation/foreign MNC/arbitrage investing – all in one bucketized porfolio. 🙂
    – prefer to see, if I could get 8% as div. yield on my initial capital 4-6 yrs down the line, in addition to whatever return on capital. mostly prefer to invest in a company which gives dividend
    – one or two quarters’ sales/NP zooming will reduce the high PE, even if invested at >20<30 PE range
    – I find NMDC/Coal India good with cash (for eg.), eventually govt. holding will come down and investor activism will go up over the years. guaranteed, I guess

    Many of those buffet/munger rationale and the US investment stories – good to read. but for India, we have a long way to go in terms of mcap, market maturity, eco system, regulation, shareholder activism and many such. not in favor of doing a direct comparison with them

  3. shodhannv says:

    For retail investors who doesnt have information, analytical & behavioral edges (As Jana pointed in his latest post), I feel your statergy is the best available option.
    Another point as I said in twitter, your entry investment has grown from average 50K to 150K, is this a sign of raging bull market ? 🙂

  4. JB says:

    One way to go forward is that to sell a portion of your stock. Usually to recover your cost of investment and maybe have a token profit. It always feels nice to have a token profit in hand and to still have some of the stock left in your account. That ways even if it goes down in value one wouldn’t have the fear of capital erosion. One can then reinvest this capital in another stock that has the potential to grow

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