(Name that movie: This image is from what movie? I'll give you the answer at the end).
I often get some questions along the lines of “do you have any ways to help investors hold on to their stocks longer?”
I’ll show you a practice I use, which may help you as well.
It comes right out of the 1972 classic 100 to 1 in the Stock Market by Thomas Phelps, which Chuck Akre recommended to me years ago and which inspired my own book 100 Baggers.
Here is what Phelps did in his book: He created a table with some basic financials of Pfizer over the previous 20 years, like so:
Very basic, simple stuff. And then he asks “Would a businessman seeing only those figures have been jumping in and out of the stock?”
And he answers: “I doubt it.”
I agree. Just look at those financials. That’s a healthy business. And if you held on for the whole 20 years, you were up something like 25x, excluding dividends.
But how many people held on for that 25-bagger? Probably not many. As Phelps writes, the industry won’t let you. The industry conditions you to measure performance using quarterly or annual stock prices.
You almost never see anyone print the results of their portfolio by showing you anything like this table. You don’t see anyone in their quarterly letter show you financial snapshots of the businesses in the portfolio, or track their progress for you like this. No, you see them write about stock prices being up this or down that.
So people focus on stock prices.
If you look at stock prices, you get a different picture. For Pfizer, there were the usual peaks and valleys plus a five-year stretch where Pfizer trailed the market. And because so many people have been “sold on the nonsensical idea of measuring performance quarter by quarter - or even year by year - many would hit the ceiling if an investment advisor failed to get rid of a stock that acted badly for more than a year or two.”
And they would have missed a wonderful ride.
So, I use Phelps’s method with my own holdings. I go back only a decade usually. And I have some different numbers I use, but I recommend keeping it simple. Here is a table for one of my holdings, Copart. For purposes of this blog post, I picked out just three basic financial figures: sales, earnings per share and return on equity:
Looking only at those figures, would you want to be trading in and out of this stock? Looked at over a longer-time horizon like this, you see the business has actually gotten better with age. The ROEs today are almost double what they were in the earlier years… with no net debt.
The stock is up ~20x from 2002 to today – and today the stock is 30% off its November high. (I’ve used the drawdown to add to my position). Of course, the ride to 20x was not as easy as the financials look. There were sharp drawdowns and periods of lagging the market averages. There were economic worries and bumbling central bankers and fiat currency and bad stuff happening during those 20 years, too.
But again, focusing on these results alone and thinking like a business owner, you wouldn’t sell Copart.
So my recommendation: Make tables like this for all your stocks. Keep these tables nearby. Update them. They will help you get through periods like this.
These tables may also be revealing in another way; they may expose all the poor businesses you own. “But each investor must judge for himself,” Phelps writes, “primarily because he knows himself better than anyone else does.” There are many paths up the mountain. If you want to enjoy those wonderful multi-baggers - if you want to have a shot at multiplying your money 100-fold - then accept the challenge Thomas Phelps lays down:
“The secret of success in your quest for 100-to-one stocks is to focus on earnings power rather than prices. Can you do it?”
If you don’t get a 100 bagger, so what? The idea is to think big, to play for a big prize. Great putters try to hole every putt even though they know they won't make them all. Investors need to think like great putters. If you follow these ideas, you’ll be richly rewarded over time, even if you never get a 100-bagger. And to state the obvious: Those who never try guarantee they will never succeed.
***
Of course, the world is full of people telling you why you won’t succeed.
Felix Dennis calls them Jeremiahs, after the “weeping prophet” of the Old Testament and the author of, among other things, The Book of Lamentations. “The world is full of Jeremiahs. They infest our planet,” he writes in his book How to Get Rich. (I highly recommend it, by the way). They are afraid. Afraid of failure. Afraid of taking blame. And they delight in pointing out to others the “shriekingly obvious” that if you don’t succeed, you will fail.
So, this is another idea we have to deal with. The Fear. The Jeremiahs of the financial world churning out a drumbeat of stuff to bring out The Fear.
“How many millions upon millions of man-hours are wasted annually, I wonder, in all this doom-mongering?” Dennis asks. “Personally, I’ve had a bellyful of it.”
The problem is that their siren songs sound persuasive. What makes Jeremiahs persuasive is that pessimism sounds smart. Why?
My buddy Shree over at SVN Capital recently shared a piece about this. Basically, holding on requires a belief in some future that is not here yet. Pessimism focuses on known problems and what’s right in front of us. “If you very soberly, wisely, prudently stick to the known and the proven, you will necessarily be pessimistic.” (I recommend the piece, which you will find here.)
All the gloomers come out during times like this. They may be well-intentioned and sincere, but you have to learn to tune them out. Remember Warren Buffett’s line about forecasts telling you more about the forecaster than the future.
I have spoken with two great investors over the past month. Both have had 100 baggers. Yes, plural, as in more than one 100-bagger. Both have this tremendous ability to tune out the noise. They “hold fast,” as Phelps says. They don’t have The Fear.
As a result, they have positions in stocks I dream of having one day in my own fund; stocks trading for $50 today but with a cost basis of a few bucks. That kind of thing. They got those returns by owning those stocks for a couple of decades. That’s the magic of compounding. You'll never get there if you allow every bear market to throw you to the sidelines.
***
Last thing: Mark Boyar is right.
I’ve met with Mark a number of times. Anytime I was in New York, I’d try to get over and visit if he was in town. Mark has been in the business a very long time. He founded his firm, Boyar Asset Management, in 1975. He has great stories. (I keep telling him to write a book, which I think he is doing!)
Here is what Mark and Jon Boyar told their clients in a May 6 letter:
“We have no idea how much longer this relentless selling will continue, but we do know that we own, on your behalf, a portfolio of businesses that are reasonably priced and that are positioned to do well over the medium to long term. The near term will likely be bumpy, but we’re optimistic about the future. In fact, now is when investors should be thinking about increasing their equity exposure: historically, the best time to invest is when you feel the worst. Even highly experienced and successful investors find taking this plunge difficult, particularly when prices keep falling, but buying great businesses at marked-down prices and holding them for the long-term is historically how the best returns are made.” (Bold added).
I agree. (And I recommend the full letter, which you find here.) Today is an opportunity. That has to be your mindset. Put aside The Fear. Make those tables. And “hold fast,” as Phelps advises.
I hope this above helps you in some way. I don’t write as many blog posts as I used to because I feel like I’m repeating myself endlessly. Same essential message. Same names in the portfolio. But maybe that message needs to be heard again and again, or else the shadows advance.
In any event, thank you for reading and best of luck!
P.S. The image at the start of this post is from Master and Commander: The Far Side of the World. The phrase "hold fast" is tattooed on the hands of one veteran sailor to remind him to never let go of the rope lines during a storm, which would result in certain death.
P.P.S. Hold fast is also a pet phrase used by Phelps. One of my favorite books in my library is my hardcover of his original 1972 edition of 100 to 1, signed by the man himself. Needless to say, if you haven’t read it, I recommend it!
