In today's post, I'll go over how I've built some psychological durability to withstand drawdowns and what I'm learning more and more about exiting investments.
Exiting is a tough situation for most investors. I remember talking with Uncle about some of his investments and how there were numerous examples of how hard it was to exit an investment when you'd made a profit, but maybe the world was beginning to fall on you (in my Uncles case, this was Nortel)
For me, I'm studying always and trying to figure out the right warning signs, or updated metrics that can be used in a fundamental sense to help sense weakness in a business. If you've been following along with my blog at all, you know I'm a huge Mohnish Pabrai fan. His learning last year has resulted in large amounts of learning for me this year! He has moved more and more to the buy and hold for as long as possible, which I'm actively trying to implement into my investing.
I think this is the way to go as long as you are a long-term-oriented investor who isn't bothered by large amounts of volatility. When I first started investing I was definitely worried about how much reaction to large drawdowns in the market would be. The more I studied the businesses I owned; understood my businesses as well as I could; and studied how the greats reacted to drawdowns; then I began seeing how crazy the market really is.
I've had 2 huge drawdowns in my portfolio. I'm a big fan of the Chinese equities market and study the country in-depth, adding it to my circle of competence with more and more study. My two holdings in that market are BABA and QFIN. I've held BABA from when it was at its ATH of 317.14 all the down to its recent 52 week low of 186.07. QFIN I've held from its all-time high of 42.20 to below 20 bucks.
Do you know what I've learned from these two experiences? I understand my businesses so well, that I don't care that the price has dropped. I was able to buy into my QFIN position quickly and it's at a size I'm comfortable with. But BABA was a smaller position I started adding when I was very light on liquidity. Through all the downswing, I've been steadily adding to my position and will probably buy more until I'm satisfied with my position size.
This is how well you should understand your holdings. You should be like an iron-clad knight being peppered with pellets. Sure, it's annoying, but it's not really hurting you. This is how I see most of the news that is affecting the share price of these two holdings. If I had no idea what these companies were, and I saw the price drop in half, I'd be much more likely to follow the rest of the market and dump my shares when I see weakness. Instead, I see opportunities to buy more!
Now back to exiting.
I've learned a lot from Phil Town. He was what I consider the base of my investing strategy, as I've learned more and more I've added from other areas and deleted some things that I learned from him. One thing I have deleted was his sell signs once a business reaches the intrinsic value. I'm not here to say Phil Town is wrong, because if your business reaches intrinsic value and you have a large run-up, then you will have made a tonne of money for yourself.
I used to follow this principle, but have shifted gears. I now am more aligned with Pabrai, that I want a business that is going to be durable for the next decade. I want the business to be so damn good, that even in a decade if the investment has already become a 10-bagger, it's showing me no signs of stopping. A simple way to look at an investment that can go up 50-100x is that it must go up 10x first. If you sold at 10x, I'm sure you would be happy. But I bet if you looked back a decade later to see that the investment continued to skyrocket to 100x, you would probably be a little disappointed you got out so early.
I think using this approach will help expose you to more than 100 baggers. When I look at another of my holdings INMD, which is already a 3 bagger, I don't see any possible reason to get rid of it anytime soon.
Is it expensive? Yup.
Would I consider buying more at current prices? Nope.
Does the business continue to absolutely destroy competition and maintain its margins, while re-investing at high rates? Yup.
So the way I see it for INMD, as long as this company continues to perform the way it has and the way I think it will in the future, I'll be a partner of the founders like Pabrai and Sleep have expounded. There may come a time, where the powers of competition begin to overcome the companies ability to keep growing. At that time, I'll look where the industry is, where the company is positioned, how strong the moat is, and I'll reassess. But I don't think this point will happen for a few years, so until then I'll enjoy the show!
Look at Buffett and Munger as well. I'm in the midst of reading the Tomb that is 'A Chronological History of Berkshire Hathaway.' Those guys love to hold onto things for as long as possible. Warren Buffett has said, "Our Favorite Holding Period Is Forever." And he's largely stuck to this, he had a list of great businesses he planned on holding forever a long time ago: Cap Cities, Gillette, Washington Post were all on this list. Berkshire no longer owns them, but I don't think he sold them because the businesses were necessarily getting worse. If you get a really good price, then selling can be the right thing, and there are numerous reasons to sell.
For me, I'll continue to search for long-term compounders, that have some spawning DNA, are cheap, have great management, have a durable competitive advantage, and are in my circle of competence.
Good luck out there!