The Day I Held Everything

by: Eli Inkrot


A recent SA article detailed how one contributor sold nearly all of his holdings based on fear.

This article looks at the underlying premise on both a conceptual and mechanical level.

In the end, once you have a solid group of holdings in place, it appears that “inactivity” can often be a reasonable policy.

In a recent Seeking Alpha article, one contributor declared that last Friday was "The Day [he] Sold Everything." Within this commentary - despite indicating that it could be a big mistake - he lays out his rationale for selling (nearly) all of his holdings in one quick swoop. Essentially, he was worried. Worried about the Dow (NYSEARCA:DIA) and the S&P 500 (NYSEARCA:SPY), the economy and the NASDAQ, effectively concerned about anything the media might try to concern you with.

Now it should be underscored that this contributor was so worried that he "couldn't sleep at night." As such, it can admittedly be sensible to relieve the symptom that's causing you angst: you should never do something that takes away from your contentment if you can avoid it.

However, as demonstrated by my title, I take a slightly different ideology. Granted this happens to be my philosophy every day, but it deserves no less obvious observation. My contention, once you have a solid group of holdings in place, is along the lines of Warren Buffett's 1996 shareholder letter: "inactivity strikes us as intelligent behavior." My reasoning is based on two central constructs.

First, consider what is occurring on a conceptual level. For whatever reason, people look at stocks and their corresponding bids differently. We have no such predispositions about the many other assets that we might own. For instance, if you buy a house today, you won't wake up tomorrow looking for a ready buyer. In fact, you might go for years without once considering what someone else would be willing to pay. Your focus is that it gives you shelter, keeps you warm in the winter, cool in the summer and gives you a place to put your stuff. That is, your focus is on the value it provides and not the going price.

If you owned an apartment building, with long-term intentions, you're probably not worried about whether Zillow (NASDAQ:Z) says it's worth 5% more or 10% less. You're fixated on the monthly rent checks coming in regularly; the cash flow that it provides.

If you were a farmer, you're not worried about the price at which your neighbor may or may not propose to buy your land. You're preoccupied with the farm producing a reasonable amount of goods through time.

Yet with stocks many buy today and judge the merits of their investments tomorrow. The consistency of bids is the problem, not the business.

Moreover, it follows that worrying about the market isn't even analogous to worrying about the price of your apartment building or farm. Instead, it's similar to being concerned with the price of someone else's property 2 states away.

When you say - "I'm worried about the Dow" - consider what might be happening. You could be taking a short-sided view about something you don't even own and allowing that to influence your decision process. If you don't own Visa (NYSE:V) and IBM (NYSE:IBM), for instance, and they move by 10% each, that would change the Dow by about 250 points. Yet this is independent of the other holdings and tells you nothing about the underlying value proposition of your personal partnerships. It certainly cannot be a logical reason to think about selling General Electric (NYSE:GE) or JPMorgan (NYSE:JPM).

With the S&P 500 or NASDAQ, the effects could be even greater. Worrying about these indices is equivalent to agonizing over hundreds or thousands of companies you have no interest in ever partnering with. Worse, you look at the price action - not even the business movements - of these companies to get your decision cues.

How often does this occur in the everyday world? How often do you note the price or value proposition of an unrelated item and allow that to affect your judgment? We never say: "Oh, garage door openers went up in price, I better not purchase milk and eggs this week." Or "you know, I saw an infomercial for a cheap wind-up hose, I should probably buy hot dogs." It's ludicrous; yet it happens every day with business decisions: "the Dow is up, I should sell General Mills (NYSE:GIS)."

The second construct rests on the mechanics of thinking about a business partnership. Within the aforementioned article, he mentions several partnerships that he sold. Companies like ConocoPhillips (NYSE:COP), Chevron (NYSE:CVX), Target (NYSE:TGT), Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO), Wal-Mart (NYSE:WMT), AT&T (NYSE:T), General Mills and Wells Fargo (NYSE:WFC); all companies that I have personally purchased, and as you know, continue to partner with today.

Let's take a look at a few of these to illustrate my point. Now it should be emphasized that I claim no insight whatsoever into short-term price movements. The bids for each of these companies could go up, down, sideways and back again in the coming days, weeks and even years. Yet the business prospects tend to be a bit steadier.

Chevron - This California-founded oil giant earned roughly $11 per share last year. In the next year or so the company is expected to earn about the same, but it isn't unimaginable that it could grow profits in the mid-single digits over the long term. Additionally, this company has not only paid but also increased its dividend for 27 years. With a current yield north of 3% and a relatively low payout ratio, it seems reasonable to assume continued dividend growth. What happens to either the business or the share price in the next few months is unknown. Yet if the company is making say $20 per share and paying out $8 in dividends in the next decade (roughly 6% earnings per share and dividend growth), I know I want to be a long-term partner. Despite whatever the intermittent market bids happen to be over time.

AT&T - Like Chevron, AT&T has not only paid but also increased its dividend for going on 3 decades. AT&T is a bit different in that it has a higher yield and payout ratio, but the growth prospects don't appear to be altogether dissimilar - slow but decent for the long term. With a yield over 5%, even business results that keep par with inflation lead to reasonable returns.

Wells Fargo - I have previously described Wells Fargo as a "triple threat" investment. That is, one that has multiple areas of potential due to a lower than normal P/E ratio, the possibility for earnings growth and a reasonable dividend yield coupled with a low payout ratio. This analysis largely holds today: median estimates could lead to the possibility for double-digit returns.

Of course, similar cases could be made for the remaining holdings as well. That is, it's practical to expect respectable business results and corresponding shareholder rewards by partnering with solid businesses over the long-term. Even the "sell everything" article considered these companies the "best in the world."

I'm no market prophet: prices could go down 10% tomorrow for all I know. Yet I do recognize that the overall game is quite favorable. Profitable businesses tend to remain profitable. The point is that you may or may not get better opportunities to partner with these wonderful companies. It can be all too easy looking backwards and think "prices fluctuate, I'll just sell now and buy later at a lower price." Yet that's the strategy of far too many. In doing so, you're trading the expectation of solid returns for the unknown; a hope or gut feeling. All because some guy on T.V. was talking about something you don't own.

If you want to own great companies in 20 years, the best way to guarantee that is to own them today. Granted everyone has varying goals and preferences, but personally selling today is the exact opposite thing that would allow me to sleep well at night. I'd constantly be worried about when to get back in and how much prices would have to go down in order to offset my consistent dividend income and even if it did work out would it be lower tomorrow; it seems that's a terribly worrisome game when a very profitable one sits in inactivity.

Buffett summarizes the sentiment better than I:

"Inactivity strikes us as intelligent behavior. Neither we nor most business managers would dream of feverishly trading highly-profitable subsidiaries because a small move in the Federal Reserve's discount rate was predicted or because some Wall Street pundit has reversed his views on the market. Why, then, should we behave differently with our minority positions in wonderful businesses? The art of investing in public companies successfully is little different from the art of successfully acquiring subsidiaries. In each case you simply want to acquire, at a sensible price, a business with excellent economics and able, honest management. Thereafter, you need only monitor whether these qualities are being preserved."

Disclosure: The author is long COP, PG, GIS, CVX, IBM, WFC, T, WMT, GE, TGT, KO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.