When you look at a company over various timeframes, the idea is that you capture various business cycles (i.e., when the business is widly profitable and when it is going through tough times). Keep in mind that we’re not talking about looking at the price over various months or quarters; you should look at the financial performance of the business (revenues, earnings, cash flows, etc.) over various 4- and 5-year timeframes.

Also, don’t worry about not having a background in finance. People on F Wall Street come from all sorts of backgrounds, from students to teachers, from stockbrokers to hedge fund managers, and more. We’re all here to ask and help!

PS: There are no predictable fluctuations in the markets, and the people that claim that there are usually have something to sell you!

Thanks!

Its a “cooperative company”; so in what ways is a cooperative company different from a normal one?

Is the number of shares outstanding 7 mil? Or is the cooperative’s members actually holding onto a much larger quantity than those traded publicly?

Value

Benjamin Graham’s approach to value investing was to find companies that are selling well below Net Asset Value, and then sell when their price rises to meet NAV. Ben Graham was not interested in Moat, Management or any of the other qualitative assessments buffet uses to choose securities. Following Graham’s approach, you could buy stocks without even knowing what businesses they are in.

Graham recommended diversifying into (i think) 30 or so stocks.

Focus

Buffett’s approach is closer to Fisher’s approach, where you seek to know EVERYTHING about your business. Buffett could not sell at 90% of IV, because he would have to know EVERYTHING about too many stocks.

Buffet recommends holding around 10 stocks.

You are absolutely right, and I agree with you 100%. I’m curious what Joe does himself? Very few posts on F Wall Street so far have concerned the sell discipline, mostly focused so far on the buy discipline.

Joe, any future posts coming on appropriate selling policy for entrepreneurial investors?

“Because of the way the tax law works, the Rip Van Winkle style of investing that we favor — if successful — has an important mathematical edge over a more frenzied approach. We have not, we should stress, adpoted our strategy favoring long-term investment commitments because of these mathematics. Indeed, it is possible we could earn greater after-tax returns by moving rather frequently from one investment to another. Many years ago, that’s exactly what Charlie and I did.

Now, we would rather stay put, even if that means slightly lower returns. Our reason is simple: We have found splendid business relationships to be so rare and so enjoyable that we want to retain all we develop. This decision is particulary easy for us because we feel that these relationships will produce good – though perhaps not optimal — financial results. Considering that, we think it makes little sense for us to give up time with people we know to be interesting and admirable for time with others we do not know and who are likely to have human qualities far closer to average.”

In other words, yes, more optimal results can expected to be achieved by buying $.50 dollars and selling them for $.90, although this requires a more full-time commitment. I, for one, am committed to this approach.

Thanks though, Joe. It’s a thought I’ve always pondered. I’d like to think that if I focus enough, I can move above 20% over the long term.

1. they hold at least 20 positions (ie, no more than 5% of assets in any one company), and
2. they don’t own more than 10% of any single company.

To keep within the boundaries of the law, most funds typically hold at least 40 or 50 positions. If one grows too much too quickly, it has to be sold – in whole or in part – to stay within the letter of the law.

In addition, most funds keep a portion of their assets in cash to handle investor redemtpions. This is an additional drag on performance.

These restrictions do not exist for closed-end, non-diversified funds – whether public (like CGM Focus Fund) or private (like Pabrai Funds). (Though CGM Focus Fund is still bound by the “no more than 10%” rule above).

Assuming all three (Oakmark Equity Income Fund, CGM Focus Fund, and Pabrai Funds) all use exactly the same methods (they don’t) and look at exactly the same opportunities, you would see that, as a whole, the returns would likely increase from Oakmark to CGM to Pabrai, as would the volatility. Why?

Oakmark can only put up to 5% of its assets into its “best” idea, and has to put the rest of its money to work in other things. CGM can put up to 25% (according to IRS regulations) into its “best” idea, but can only acquire up to 10% of that company’s securities. Pabrai can put up to 100% of its assets into its “best” idea, even if that means owning the business outright.

Of course, Oakmark, CGM Focus Fund, and Pabrai Funds all invest differently so this is simply a discussion of the three types of entities and the obstacles they must overcome to achieve superior growth.

Make sense?

As an aside I think Prabai premise is that you can buy small companies at 50 and sell at 100, which is an opportunity no longer available to Buffett given size. Buffett’s strategy though makes complete sense to me though unless you actually get the company trading v far above instrinsic, i.e. Petrochina. Perhaps you are supposed to sell when stock trades 30-50% over intrinsic, but I really havent actually looked through the Petrochina trade so I’m just thinking out loud. Good idea though thanks.

How realistic do you think that 20-30% band is for Buffett-like investors, working very hard? I

‘m just going off of the returns from some well known mutual funds that work as such- Oakmark, Longleaf, Legg Mason, Third Avenue (a bit different but still buy and hold) who seemingly cannot escape the 14-18% band over the long term. I know Pabrai has talked about how buying at 50 and selling at 100 over time will produce much higher returns than buy and hold. What do you think about that?

-Jeff