Bloomberg recently conducted an interview with Mohnish Pabrai and Jean-Marie Eveillard, two well respected value-oriented investment managers. Bloomberg's Betty Lui questioned whether the "buy and hold" investment strategy was still worth pursuing. Specifically, Lui asks, "Have there been times when Warren Buffett should have sold out or done shorter-term strategies in order to maximize returns?"
Pabrai responds by saying that it is a common misnomer that Buffett is a "buy and hold" investor. If one were to study Buffett's investment history over the past 50-55 years, there are very few stocks he has held for many years. Pabrai states that the reason why Buffett appears to "buy and hold" investments is due to Berkshire's large capital base. He states that investors with smaller amounts of capital might be better served by following Buffett's early strategy of buying "forty to fifty-cent dollars" and selling those assets once they reach fair value. He also warns that comparing value investing to "buy and hold" is like comparing apples to oranges.
Jean-Marie Eveillard disagrees with Pabrai's assessment. He states that the reason Buffett moved to "buy and hold" was "not due to the size of AUM, but rather because he moved from a Benjamin Graham-type approach early in his career, to his own approach" of buying good businesses for the long term.
So, is Buffett really a "buy and hold" investor? We would postulate that this question depends on the type of company in Berkshire's portfolio. Investments made in Coca-Cola (Nasdaq: KO), Moody's (NYSE:MCO) and The Washington Post (NYSE: WPO) were initially made because Buffett thought each company would be worth much more in 20 to 30 years than it was worth at the time of purchase. These positions now represent large core holdings of Berkshire Hathaway. It might be costly to dispose of these investments in most market environments.
It might serve us well to look at Berkshire Hathaway's recent past and some of Buffett's commentary in a couple of his annual shareholder letters to get an idea of how he views investments.
On page 20 of Buffett's 2003 Annual Letter to shareholders, he writes,
...I made a big mistake in not selling several of our larger holdings during The Great Bubble. If these stocks are fully priced now, you may wonder what I was thinking four years ago when their intrinsic value was lower and their prices far higher. So do I.
We made one large sale last year. In 2002 and 2003 Berkshire bought 1.3% of PetroChina for $488 million, a price that valued the entire business at about $37 billion. Charlie and I then felt that the company was worth about $100 billion. By 2007, two factors had materially increased its value: the price of oil had climbed significantly, and PetroChina’s management had done a great job in building oil and gas reserves. In the second half of last year, the market value of the company rose to $275 billion, about what we thought it was worth compared to other giant oil companies. So we sold our holdings for $4 billion. A footnote: We paid the IRS tax of $1.2 billion on our PetroChina gain. This sum paid all costs of the U.S. government – defense, social security, you name it – for about four hours.
As can be witnessed by the PetroChina investment, Buffett fundamentally believes in purchasing assets that are undervalued and selling them when they exceed fair value. Therefore, Buffett should probably not be typecast as a "buy and hold" investor. He is an amazing capital allocator who purchases undervalued assets he hopes to sell when prices reflect fair value.
Disclosure: Long BRK-B, no other positions.