Till death do us part - my 'never sell' list
James Greenhalgh owns a number of stocks he intends to take to his grave. When you own great businesses, why sell?
In the iSentia, Navitas and more podcast a month ago, I outlined my personal ‘hold until I die' list. The segment, Thinking Allowed, was brief and member Christian T asked for more detail. So here's a blog on the subject (thanks Christian).
(You can listen by jumping to minute 43 of the podcast, although it's not necessary. Writing this piece required listening to my own voice and I'll cover the main points here to avoid inflicting it upon you).
The basic notion is that there are a number of stocks in my family portfolio that I intend to continue holding until I die. Based on my life expectancy, I might hold some stocks for another three or four decades. I've already held Commonwealth Bank (ASX: CBA) for two.
My approach has been influenced by a couple of Warren-Buffettisms. In Berkshire Hathaway's 1988 letter to shareholders Buffett wrote: ‘When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever'.
Buffett has also used the (allegorical) story of the 20-punch card: You should treat stock purchases as if you're only permitted to buy 20 times in your life. Once you've made 20 purchases, you're done.
Before turning to my list, why on earth would anyone want to hold stocks forever? Isn't it better to construct a portfolio of the most underpriced stocks you can find? This is exactly the point colleague Gaurav Sodhi made in the podcast, and it certainly has merit.
Lethargy bordering on sloth
But as I get older (and more financially comfortable), there's a lot to be said for making life less complicated. In short, I want to make fewer but better long-term decisions. Here's another Buffettism, this time from his 1990 letter to shareholders: ‘Lethargy bordering on sloth remains the cornerstone of our investment style'.
He's being jocular of course, but inactivity is a good thing. Switching between stocks costs money and it's easy to underestimate the drag of brokerage and taxes on your portfolio. Switching also involves time and effort, and there is (shock, horror) more to life than investing.
Over two decades of investing experience, I've also learned that selling apparently highly priced but excellent businesses has usually turned out to be a long-term mistake. It's why I wrote Good things happen to great businesses back in 2014. Wonderful companies can end up creating value over time in surprising ways, whether through internal investment or acquisition.
Often it's simple mathematics. Companies that can reinvest capital at high rates of return can compound value significantly over time. Cochlear (ASX: COH) – another of my ‘never sell' companies – has ‘seven-bagged' since I bought it 13 years ago. That's a 16% annual return, plus dividends, achieved because of a cheap purchase price – bought on bad news – as well as Cochlear's ability to reinvest earnings at high rates.
Into the never-never
So what stocks do I own that are on my personal ‘never sell' list? I've already mentioned Cochlear and Commonwealth Bank. ASX (ASX: ASX) and InvoCare (ASX: IVC) are a couple of others. Also on the list are Westfield Group (ASX: WFD), Sonic Healthcare (ASX: SHL), Macquarie Group (ASX: MQG), and (probably) Computershare (ASX: CPU) and Seek (ASX: SEK). With the exception of Westfield and Seek, I've owned all these stocks for at least five years. Over time, more personal holdings might join the list.
The reason they've made it on to my list is because I consider them durable. They're likely to be bigger and better businesses ten years from now (for other examples, members can head to the Australia's 10 best businesses report published in June 2016). These stocks won't necessarily produce stellar returns from here, though, as none look obviously cheap.
There are, as always, a few caveats. By ‘never sell', I mean that I can't imagine selling them at this point in time. It's possible that Computershare or Seek might be disrupted over time, in which case I might sell if their prospects deteriorated. Management changes will be another catalyst to review the investment case.
Sell, but don't sell out
Vitally, ‘never sell' also does not mean ‘never reduce your portfolio weighting'. Over time I've progressively sold down Commonwealth Bank, Macquarie Group and Cochlear so that they're now sensible weightings (I'm particular worried about the ‘blow up' risk for banks). Having topped up Computershare at prices below $10 a share last year (around the time of Computershare: Result 2016) it's now my largest holding, so it's probably due for a haircut too.
Finally, this is a personal list. The stocks on your list might be different from mine, but they should be durable. If you're not sure if they'll be bigger and better businesses in ten years, they probably don't deserve a place on your list.
So what's your approach? Do you try to own the most underpriced stocks you can find and replace the least underpriced ones regularly? Or do you prefer my slightly more set-and-forget approach and trust compounding to do its work? Let me know in the comments below.
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Disclosure: The author owns Commonwealth Bank, Cochlear, ASX, InvoCare, Westfield Group, Sonic Healthcare, Macquarie Group, Computershare and Seek. This is not a recommendation.
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