Charlie Munger – Paradox in Hold vs. Buy


Paradox in Hold vs. Buy Decisions In Long Term Investing


  • Paradox for the long-term investor:
    • Already knows that buying at reasonable prices and steadfastly holding on to good quality businesses run by quality managers is likely to be profitable in the long term
    • Based on this belief, you construct a portfolio and plan to hold on to it for a long time
    • After a while, you get some cash and that’s what creates the paradoxical situation
      • You are no longer willing to buy more of what you already own but you don’t mind holding on to these businesses
    • Trader friend tells you that you buy your own portfolio every day – holding on to a position is the functional equivalent of selling it and immediately buying it back (ignoring transaction costs and taxes)
      • Therefore, if you’re not a buyer of a position you own, then you should be a seller
    • Rules for buying a business and for holding a stock are not the same
    • Inspired by quotes of Keynes and Ben Franklin:
      • “The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave causes, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only” – Keynes
      • “As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes” – Keynes
      • “Keep your eyes wide open before marriage, half shut afterwards” – Ben Franklin
    • Munger at a lunch hosted by Howard Marks:
      • “Psychologically, I don’t mind holding a company I like and admire and I trust and know that it will be stronger than now after many years. And if the valuation gets a little silly, I just ignore it. So, I own assets that I would never buy at their current prices but I am quite comfortable holding them.
        Well, I am almost constitutionally… I have a defect. And I just won’t pay 30 times earnings… I have never done that but I have one or two now which are now worth 8 or 10 times what I paid for them and they are still marvelous businesses and are still growing and I just hold them. Many investors I know are like me. I cannot defend it in terms of logic. I don’t defend this logic. I just say this is the way I do it and it keeps me more comfortable to do it this way. And I am entitled to this, it’s my own money and I am entitled to do it my own way. Li Lu is just like me. He will hold things that he bought a long time ago at tiny prices in what are still great companies but he won’t buy more”
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