Warren Buffett’s most often cited quote has to be some version of his favourite holding period being “forever”. It crops up all the time in the investing world as a chide against those selling during a market correction for example. But, I don’t think the Oracle was outing himself as an a steadfast HODL disciple before it was (supposedly) cool when he wrote his 1988 chairmans letter to the shareholders of Berkshire Hathaway.
In 1988 we made major purchases of Federal Home Loan Mortgage Pfd. (“Freddie Mac”) and Coca Cola. We expect to hold these securities for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.
We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds.
Berkshire Hathaway Inc. Chairmans letter to shareholders 1988
Did he mean to be taken literally? I don’t think so. This was not a rallying cry for investors to stick to their guns until the end of time. The paragraph that follows the “forever” one in that 1988 letter confirms this for me. It speaks about a pattern of behaviour of sell rising stocks in companies that are performing well and hanging onto losers that is the antithesis of Mr Buffets investment philosophy.
Further along in the 1988 letter there is more clarity. Mr Buffet speaks about concentrating his investments in companies who he feels he understands well and have great long-term prospects. When he finds companies like that he commits financially, and if they continue to perform well, then why would he sell them?
We continue to concentrate our investments in a very few companies that we try to understand well. There are only a handful of businesses about which we have strong long-term convictions. Therefore, when we find such a business, we want to participate in a meaningful way.
Ideally, my (or our) favourite holding period would be forever, is probably how the quote should be interpreted. It doesn’t mean buy and hold indefinitely without thought. Nor does it mean ignoring a crashing share price and committing to holding until you breath no more, and then asking you kids to take over the mantle of responsibility to keep the stock in a portfolio on your behalf. What it means is that if an investor has identified a stock in a company with outstanding management, a wonderful business model which operates in a growing and sound market, and year after year the company continues to turn out impressive results then why would you sell the stock now? You would hold on as long as the good times continued, which would hopefully a long time.
Warren Buffett sells stocks all the time
No stock gets held forever. Even multigenerational holdings don’t cut it. Forget forever. Think more about not being in a rush to sell. Money invested in the stock market should not be needed for day to day expenses. It should be committed for years, perhaps decades and allow for the patient accumulation of capital without the need to make a quick buck and get out to buy something shiny. Rising stocks in companies that are doing well are flowers, not weeds. Let them grow. Just don’t assume that you cannot touch them or you are betraying some ideal.
Mr Buffett sells stocks all the time. The authors of a 2010 paper looked at all Mr Buffets trades from 1980 to 2006. They found that the median holding period was one year. Some 30% of stocks were bought and sold within six months. Just about 20% of stocks survived for over 2 years. Warren Buffett will get out of a stock and sell quickly if it turns out to be a weed rather than a flower.
He has however held positions in Coca-Cola, Wells Fargo and American Express in the Berkshire portfolio for more than a quarter of a decade. That’s not forever, but in todays investment climate being involved for that long might seem like an eternity. Although these positions have been trimmed and added to over the years. So, even some shares of a stock in a “forever” company are not immortal.
You do buy stocks rather than companies
Warren Buffett says that buying a stock should be considered as buying a slice of ownership in a business. This is technically true. Yet, he and the rest of us are in different positions. His slice of ownership is usually a good chunk of the whole cake. Mine is more like a crumb of a crumb that’s left in the wrapper. We don’t have anything close to the same influence as owners.
For most of us out stock purchases are more like bits of electronic paper than slices of ownership. That does not mean that the underlying company should be ignored. I am not advocating for just looking at a price chart and making decisions based solely on that. Yet we do buy stocks with the hope of selling these electronic records of ownership for more latter, and perhaps getting paid along the way in the form of dividends. How many retail investors feel like owners? Would you tell someone you were a part owner in Apple because you owned a hundred shares? I don’t think you would, and neither would I.
For someone who owns a business in the truest sense, when its doing well or badly, the compulsion to sell is not usually there. They are invested in the business itself, because they can influence its direction. Most investors cannot. They are invested in an asset tied to the fortunes of the business.
Some assets have ongoing benefits or not. A house is an asset, but its price going up is not the only way to get utility from it. It is also a home. Artwork is an asset, hanging it on your wall makes for an enjoyable gander from time to time, plus all your friends will think you are a person of culture when they see it.
A stock holding unless it pays dividends has no on going benefits. And a patient investor will reinvest those dividends anyway, so no enjoyment will be had there, unless they are living on portfolio income. We don’t buy stocks just to have them. We derive not benefit from owing them aside from income and realised capital gains. Why would you want to hold them forever if they paid no dividends? Just to watch an account balance rise? No, at some point they have to deliver cash either to you or your descendants. Cash is king. I don’t think Warren Buffett would argue with that.
References:
- Berkshire Hathaway Inc. Chairmans letter to shareholders 1988
- Hughes, John S. and Liu, Jing and Zhang, Mingshan, Overconfidence, Under-Reaction, and Warren Buffett’s Investments (July 5, 2010).
DISCLAIMER: James J. McCombie does not own any of the shares mentioned. The Storied Investor has no beneficial ownership position in any of the stocks or securities mentioned. No comment in this article should be construed as a recommendation of, or opinion regarding the future performance of, any stock or security or collection of them mentioned herein. Opinions expressed are the author’s and do not represent the views of The Storied Investor.
The Storied Investor 