Value Investing Video

In the following video I discuss some value investing myths. You can access the complete value investing course here.

Value Investing Video Transcript

Now in this video I am going to share some general thoughts surrounding value investing. Even if you are new to value investing chances are you already know a little bit about investing. Of course I’m going to cover this topic in great detail through this course.

When it comes to value investing there is actually a lot of free advice available on the internet. Over time I have realized that if you are not careful in analyzing this information, you may be misled.

How Long is Long Term in Value Investing

I’m sure that you know that value investing relates to investing for the long term. So naturally you might ask how long is long term. One of my favorite quotes on this topic comes from warren buffet and it goes like this:

“Our favorite holding period is forever”

I see many people think that this means they should hold on to all their investments for a very long time. Kind of buy and hold forever strategy.

Warren Buffett Portfolio Turnover

Let me share with you an interesting statistic that relates to Warren Buffet. So some professors actually analyzed his portfolio  between 1980 and 2006. They found something very interesting with respect to his average holding period for stocks. Specifically they found that his median holding period was just one year.

In fact only 20 percent of the stocks that he bought he kept them for more than two years.

Almost 30 percent of the stocks or he sold them within six months.

So on one hand he is saying that his favorite holding period is 1 year. On the other hand we are seeing that he’s holding only 20 percent of his stock picks for more than two years. I found this quite intriguing at first but I read a lot on this topic and I present to you my take on this topic.

The first thing you should realize is that when warren buffett says his favorite holding period is forever it’s not exactly same as saying that he’s going to hold onto each of his stock picks forever.

So maybe he probably means that he would love to hold on to each of his forever but then such stocks may be hard to find or they might be pretty rare.

Warren Buffett Investing Journey

In order to reconcile this apparent contradiction between his actions and his words it is very important to understand a bit of his investing journey. Warren Buffett was a student of Benjamin Graham. Benjamin Graham is regarded as father of investing. So of course Graham had a great deal of influence on Buffett’s early investing life.

Benjamin Graham investing strategy broadly involved looking for decent businesses that are very easy to understand. Then buying them when they are available at bargain prices.

Details of the strategy I will cover later in this course but a key feature of his investing strategy was his exit strategy. Now his exit strategy was to exit that investment If the prices rise by 50 to 60 percent in 2-3 years.

However if this 50-60 percent move does not materialize in two to three years then he  recommended to exit the investment. So basically he had some sort of a target price for each of his investment. Also he had a time based stop loss for every investment.

So if you thought that the concept of stop loss is only for technical analysis folks then it seems it’s not that way. Especially if you understand from father of value investing perspective.

Investing Strategy of Great Investors

Now Buffett employed Graham’s strategy extensively especially during his early investing years. It was only after a few years that he also started using moat based value investing.

Moat based Value Investing involves buying companies that have sustainable competitive advantage in their business. So the idea is to buy great companies when they are available at fair prices and then hold on to them for as long as their competitive advantage sustains which could theoretically be forever.

When it comes to this contradiction between Buffet’s words where he says that his favorite holding period is forever while we see that his actual median turnover is just about 2 years.  This contradiction in my opinion can be explained to a huge extent. That is if we consider the possibility that he still engages a lot in graham’s investing strategy along with moat based investing. Also I believe he is involved a lot in investing in special situations which may arise from time to time. If you take all this into account you can reconcile this seeming contradiction between his actions and his words.

Conclusion

More importantly as far as we are concerned it should probably make 2 things sufficiently clear to you.

Value investing is not about holding on to your every stock investment forever. In fact only a few of your investments may be so good that you hold on to them for very long. Say a decade or more.

Secondly even in value investing you need to have a stop loss.. It is not necessary that your stop loss is a price based stop loss. It may be a time based stop loss as in case of Benjamin graham value investing strategy. You may even choose a time period in which you expect certain positive developments to happen.

So if those developments don’t happen in that time period, you may reevaluate your investment and exit your investment.

This will actually help you avoid a situation where you continue to hope against hope and continue to hold on without a substantial reason.