Tuesday, August 9, 2022

A little Tectonic effort required

Buffett once said his favorite holding period was forever. 

Hold on to the great business, do nothing, and allow it to compound earnings for decades.

That sounds wonderful, except that the great business is hard to find.

Even when the rare great business is spotted, the market may already price it as such, reducing your potential return.

For many followers of Buffett, their outcomes are worse than a missed opportunity. 

They invest in businesses that look great but aren't. Look at those companies that showed exceptional growth only during Covid.

Or they buy expensive stocks because great businesses deserve high valuations, only to see them melt away in time.

The worst outcomes belong to those who hold onto not-so-great businesses through corrections, just to sell near the bottom.

It is not easy to do what Buffett does.

Your favorite holding period is unlikely to be forever.

I sold ETCC (see here for writeup) yesterday at my target price, a 4-year high. The price was about .75x ttm sales, which is the middle of the .5-1.0x range that ETCC was in during most of its history.

The price action was captured by the single large green candle (at the extreme right) in the 10y chart below:

What I want to highlight is how short-lived the opportunity to sell at my target price (about $0.90) was. See the price action again, now shown in a 2d chart:

ETCC surged more than 50% late on Aug 5 Friday and closed at my target price. I should have sold but failed to place orders.

I then placed limit orders to sell on Monday, which allowed a smooth exit when ETCC opened.

I didn't know that the stock would plunge, so do not applaud my timing.

What is worth noting is the sudden surge. nulla-spe (meaning hopeless) stocks responds quickly even to slight changes in sentiment.

When surges are accompanied by news or filings, it is wise to re-underwrite the investment case and adjust target prices.

When they are not, like in ETCC, I stick to target prices and sell, even when the rationale behind the surge is unclear.

It is tempting to hold a surging stock beyond its target price. What if buyers bidding up the stock know something that you don't? 

That may be true. It may also not be. When it is unclear why prices move, I avoid guessing and rely on what I know.

To not guess is a conscious decision because it defies instincts. The intuitive act is to guess because of the innate human instinct to explain something that lacks clarity. 

After selling ETCC, I continue to monitor it. Its price may justify me owning it again.
Mark Twain said that what kills you is what you know for sure that isn't true. I strive to invest like Buffett does. But before I know for sure, this approach works for me.