people in motion

people in motion

vendredi 3 mai 2013

Portfolio Strategy : Buying right and Holding on

Doing Less Returns More !
The coffee can approach

Inactivity strikes us as intelligent behavior. Warrant Buffet

It is awfully hard work doing nothing. Oscar Wilde

'The coffee can portfolio concept harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under the mattress,' Kirby wrote. 'The success of the program depended entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with.' 
G. Kirby, “The Coffee Can Portfolio: You Can Make More Money Being Passively Active than Actively Passive,” The Journal of Portfolio Management, Fall 1984, 76-80

See research here 

This is an inspiring tale, a triumph of lethargy and sloth. It shows clearly how the coffee can portfolio is designed to protect you against yourself - the obsession with checking stock prices, the frenetic buying and selling, the hand-wringing over the economy and bad news. It forces you to extend your time horizon. You don't put anything in your coffee can that you don't think is a good 10-year bet.
Poor Kirby had been diligently managing the wife's account - keep up with earnings reports, trimming stocks and adding new positions. All the while, he would have been better off if he followed the idler's creed and just held onto his ideas.

  • Investors often make changes to their portfolios—with the best of intentions—that do not add value.
  • These mistakes include reallocation of a portfolio from one asset class to another as well as switching from one manager to another within an asset class.
  • Analysis through simulation shows that investors would be better off extending the industry standard three-year window for manager assessment.

This example reminds me of the work of Thomas W. Phelps, much-forgotten investment thinker who has since become one of my favorites. Like Kirby, Phelps also believed in the power of 'buying right and holding on.'
Why don't more people hold fast? Phelps writes that investors have been conditioned to measure stock price performance on a quarterly or annual basis, but not business performance.
One memorable example he uses (among many) is Pfizer, whose stock lost ground from 1946-49 and again from 1951-56. 'Performance-minded clients would have chewed the ears off an investment adviser who let them get caught with such a dog,' Phelps wrote. But investors who held on from 1942-1972 made 141 times their money.
Phelps shows that if you just looked at the annual financial figures for Pfizer - ignoring the news, the stock market, economic forecasts and all the rest - you would never have sold the stock. It was profitable throughout, generating good returns on equity, with earnings climbing fitfully ever higher. Pfizer was a good coffee can stock.
Preston Athey offered up Markel (NYSE:MKL) as his coffee can stock. Markel is an insurer and has a long-term track record as a winner. Investors are up over 2,000% since 1990. I am currently giving Markel a thorough look-through. The stock trades for $489 per share. Don’t let the high price throw you. As Preston pointed out, Markel is like a little Berkshire Hathaway. (Warren Buffett’s famous investment vehicle trades for $132,000 per share!) The key is what you get for what you pay. MKL trades for only 1.2 times book value, as compared with a long-term historical average of two times book. Insurance stocks are depressed. And as the cycle turns, you stand to gain not only as MKL’s book value increases, but also as the market restores the higher multiple on that book.

So what stocks would you put in your coffee can today? I am giving more thought to the coffee can portfolio and what I'd stash in it. What about you?

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