If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. – Warren Buffett, who became a billionaire through stock market investing
A colleague of mine once asked me about my TP of the shares I just bought. I didn’t know what he meant by TP. I thought it meant ‘toilet paper;’ I soon realized that it’s ‘target price.’
Target price is a price level of a stock at which the investor or trader is ready to sell his position. I told my friend that I don’t have a target price. He was surprised. He must have thought I was crazy.
Knowing how Warren Buffett operates in the stock market made me think differently. If most people in the market are short-term oriented, I embrace the philosophy of Warren which is investing long-term.
General rule
In almost all interviews, Warren admits that he is going hold shares of great companies forever. Selling stocks is simply the last thing in his mind.
Some of the well-known companies that he still has ‘til now after more than a decade or two of holding them are:
- Coca-Cola – bought in 1988
- Gillette (now under Procter & Gamble) – bought in 1989
- Dairy Queen (DQ) – bought in 1998
Here’s the catch: he bought shares of Coca-Cola at a cost of US$1,299 million. How much is it as of 2013? It’s worth US$16,524 million. So, it’s a 1,172 percent return in 25 years! Not bad.
If we happened to buy shares of Coca-Cola at the time Warren bought them and still hold them, our Php10,000 would be Php127,200; and we earned it without paying any tax.
What’s his reason for holding shares for so long?
Warren reveals that as long as people continue to prefer Coca-Cola products over others brands even at a higher price, he won’t sell. That’s the same thing with Gillette, DQ, and other great businesses he holds.
He calls this idea as ‘til-death-do-us-part policy. He says, in his letter to Berkshire’s shareholders in 1987, that:
We are quite content to hold any security indefinitely, so long as the prospective return on equity capital of the underlying business is satisfactory, management is competent and honest, and the market does not overvalue the business.
Rare occasions
Indeed selling stocks is more difficult than buying them. An investor may realize later three things: he sold just on time, too early, or too late. You’ll never know until it happens.
There are some conditions though that may prompt Warren to sell.
In his 1987 letter to the shareholders of Berkshire Hathaway, he mentioned some conditions before selling:
- when the market makes a business more valuable (expensive or overpriced) than the underlying value of the business
- when they need fund to finance a purchase of a company that is fairly valued or even undervalued
- when they need money to buy a business they believe they understand better.
But make no mistake about this. Even though he has the basis when to sell, he still makes misjudgment. There are times he realized he sold so early.
In a talk he had to some university students, he admitted his mistake when he sold his position in Walt Disney just after a year of holding it.
He bought 5 percent of the total outstanding shares of it in 1966 for US$4 million, but sold immediately in 1967 for US$6 million.
Had he not sold it, he regrettably admits that it’s now worth more than a billion dollar.
But because he finds Walt Disney to remain a wonderful business, he bought back its shares in later years at a much higher price.
This reminds me of my position in URC (Universal Robina Corporation). I bought it at P28 and sold too early at P50. I never bought it back even though I was aware of the fundamentals of C2 drink and Jack ‘n Jill product lines.
It’s now P197.
One thing to learn here is, never sell the goose that lays the golden egg, otherwise it becomes somebody else’s treasure.
I subscribe to the practice of Peter Lynch, another great investor. Hold your shares of a wonderful business for at least three (3) years before thinking of selling.
Again, at least three (3) years. It can work miracles in your pocket.
