Why and when to sell
Cherry-picking the cherry-picked
A stupid way to go through life is to exclusively examine exceptions to commonplace rules & heuristics. But there’s good reason to do this when investing in public equities: merchant-acquiring credit card networks and airlines could both be considered oligopolies, but their profit margins are very different. So oligopolies price their product rationally, except when they don’t. Crisis averted- skip that investment in airlines; unless, what if they decide to price rationally? Is that feasible? Well, how did Visa and MasterCard do it? Isn’t that illegal? The railroads did it! I try to avoid this reasoning and line of inquiry.
Sound-good explanations replace lived experience and hard data. I will give an example:
1.) I tell you that visiting tourists to foreign countries renting a car for the first time get into accidents 10 times more frequently than when they drive in their home countries. Makes sense! Foreign roads, signs in different languages, maybe a different make of car they’re using to driving- that sounds good- phenomenon explained.
2.) I then tell someone else the converse is true: visiting tourists to foreign countries renting a car for the first time get into accidents 10 times less frequently than when they drive at home. Makes sense! They probably drive less than they do at home, drive more cautiously and obey the speed limits for fear of being pulled over by foreign police. That sounds good- phenomenon explained.
These soft explanations for behavior can directly contradict. On top of this, data can be massaged. Do most oligopolies price rationally to make their cost of capital? What do you define as an oligopoly? Cost of capital? How do you define “most”? Majority or plurality? What counts as a tourist? Are Brits considered “tourists” in Wales?
This heuristic→ counter-heuristic→ exception-to-the-heuristic line of thinking drives the decision of when to sell a stock. As a poor person, the answer to the question of when to sell is simple: there’s liquidity and I’ve found something else that’s way more compelling in terms of price-to-value. I’ll own no more than a handful of stocks; my downside is simply remaining a poor person.
Mutual fund managers, pod shop guys, quants, all generally have something programmatic in place to answer this question (weights vs. benchmark extended, maybe an oversold/overbought indicator, maybe Cramer or something). But effectively it’s using a data set that’s cherry-picked. They’ve made a determination that a Brit should absolutely be considered a tourist in Wales (or vice versa).
I’ve been re-reading the BRK annual report transcripts, so this topic has been top of mind. Buffett publicly stated something interesting about when BRK would sell a privately held business. Of note, which clearly meets rule #1 below, BRK sold its newspaper operations to Lee Enterprises for $140mm. He said two circumstances explicitly (I’m paraphrasing- I would like to focus on #2):
1.) When the business was sure to make no money and require “incessant” capital. Makes sense- a permanent capital vehicle gets rid of anything sure to lose capital, permanently. Even if it hurts the reputation a bit.
2.) When labor relations were sure to make the business unprofitable. This was the more interesting of the two topics.
What’s funny about this is that Buffett has tacitly acknowledged that some businesses are simply run for the benefits of the employees. Share capital-formed businesses can eventually become socialist collectives. Matt Levine talks about this in banking and its compensation to the point of shareholder detriment; most shrewd banking analysts can tell you about this phenomenon. European banks are almost explicitly run for the employees and the government- you can see this in the price chart of the stocks and the pricing of other capital instruments.
Whether it’s an accident of capitalism or just the nature of some businesses, it’s interesting that Buffett has observed this phenomenon. If this is one of Buffett’s rules, and assuming he doesn’t underwrite this eventual outcome in his purchase price, surely he’s insinuating it could happen at one of his portfolio companies? Or is this simple prophylaxis? Or CYA? When could labor relations really disrupt profitability that much outside of traditional union businesses? What about automation and technology? That’s how the rails got around profitability challenges! More heuristics.
It’s fascinating, but ultimately about as applicable to the individual investor as observing a mutual fund manager selling down a stock after its its weighting changes too much relative to a benchmark. Or deciding that a Welshman should not be considered a tourist in London.