Weekend Reading for 6/1/2017
Sitting on Your Ass
Buffett style fund manager Mohnish Pabrai is one of the most respected value investors in the world. In his recently released annual letter to investors, he had some great insights. Pabrai was lamenting the fact that he had sold his shares in Italian automaker Ferrari early, only to see the stock price double after his exit.
Pabrai sold Ferrari to buy a company with a cheaper valuation. He stuck to his process, which we can’t fault him for.
“The reason I wanted to include my adventures with Ferrari in this letter was to try to reinforce in my brain the importance of just sitting on your ass when you own great businesses run by great managers. It is not a good idea to sell them unless they are egregiously overvalued. I may have felt Ferrari was fully priced at $44, but by no means was it egregiously overpriced. And today, at $84, I can see actions that Sergio can take that may make $84 look cheap in a few years.”
This week, Amazon’s share price eclipsed $1,000. How many people are kicking themselves today because they sold Amazon years ago citing valuation? I know I did!
Of course, it is easy to draw these conclusions in hindsight. Another observation we can make is that no matter how beneficial a process is to long-term outcomes, there will always be regrets. And that’s ok. Did Pabrai really make a mistake by selling Ferrari? No, but he can still regret it.
I have a few other thoughts on the importance of “process” that I’ll share in the coming weeks. Until then, have a great weekend!
Chart of the Week
Fun piece this week from Priceonomics looking at Average Revenue Per Employee for every company in the S&P 500.
Overall, Energy companies led the pack in Revenue per Employee, followed by Healthcare and Utilities. Technology companies showed themselves to be labour-intensive with RPE at the lower end of the range, and close to Consumer Discretionaries like restaurants and hotels.
3 Good Reads
Waiting for a Market Crash is a Terrible Strategy (Samuel Lee)
“In my experience, investors sitting on a lot of cash are usually worried about equity valuations or the economy, and tell themselves and others that they’re going to buy gobs of stock after a crash. The strategy sounds prudent and has commonsense appeal—everyone knows that one should be fearful when others are greedy, greedy when others are fearful. But historically waiting for the market to fall has been an abysmal strategy, far worse than buying and holding in both absolute and risk-adjusted terms.”
The End is Everything (Nick Maggiulli)
“You want the highest returns when you have the most money in play.As you add money to your invested funds over time, your risk gets amplified such that a negative return in later years will cost you more in absolute dollar terms than in earlier years. Therefore, downturns early in your investing life can be ideal, as their impact on your final portfolio value are small compared to downturns later in your investment life.”
Forecasters Not Held Accountable (Larry Swedroe)
“The financial media loves to highlight forecasts because they need investors to “pay attention”—that’s the winning strategy for them even though they know, or should know, it’s the losing strategy for investors. And they anoint the latest guru who happens to get one forecast right. However, holding forecasters accountable is as rare as the proverbial “black swan.””
Enjoy your weekend!