January 27, 2006

Long term buy and hold is not long term buy and forget

I keeping reading this debate on whether long term buy and hold is a smart strategy or is it a fad followed by buffett followers.

It would seem to me that such a discussion clearly shows that the person debating it really does not get the core idea of the approach. Long term buy and hold is not long term buy and forget. There is no such business which one can buy and forget. When there is such intense competition, one has to follow or track the company in which one is invested.

My typical approach to understand the industry and then the company in detail. If I am comfortable with the company and the industry and if the valuation is compelling, I tend to slot the company into one of the three buckets

Type 3 companies are value stocks (graham style) where the intrinsic value of the business is flat or at best increasing very slowly. I hold such companies till they come within 90% of my estimate of intrinsic value and then I sell them. I do not see a benefit of holding such companies too long if the company is selling close to the intrinsic value which is turn is flat or worse, shrinking

The other end of the spectrum are my type 1 kind of companies. These are dominant companies with strong competitive advantages and their intrinsic value is increasing at decent pace. Such companies are more of the buy and hold ‘longer’ type of companies for me. I typically read the quaterly updates for these companies and try to check if their competitive strenghts are intact and they would continue to increase their moats as time passes. I have found that selling such companies when they touch their intrinsic value (atleast my conservative estimates) has not been a good idea. Most of these companies do well over time and their intrinsic value keeps increasing. So even if the company is moderately overvalued, then I would tend to hold on. Ofcourse if the company is wildly overvalued, then I would sell the stock.

The type 2 companies are between 1 and 3. This is grey area where majority of my picks lie. Most of these companies have decent comptetive advantages and their intrinsic value increases erratically. So these kind of companies require more attention and at the end of each year, I go over my thesis and try to re-think whether I should hold onto the stock or sell it , especially if it is selling close to the intrinsic value.

All of the above is a decent amount of work. Which is why I don’t hold more than 10-12 stocks in my portfolio. But finally I think there is no buy and forget kind of stock. Ofcourse I don’t follow the stock on daily or weekly basis. My follow up is more quaterly or annual.

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