Not Every Value Investing Position Is “Buy and Hold”

I’m a value investor.  My favorite type of holding is a company that generates high returns on non-leveraged equity, has a strong competitive position that is virtually unassailable, and is trading at a stupidly low price-to-earnings ratio.  These are rare and when they come along, you have to be willing to make a substantial commitment (as Buffett said, when it is raining gold, reach for a bucket not a thimble).  Since I don’t like selling stuff, I love the fact they can sit in my accounts, or the accounts of my businesses, indefinitely.

Still, I think it is important to point out that some investments are not permanent buy and hold positions. Benjamin Graham went so far to write about the mistake of believing in “permanent” investments.

A perfect case is Saks Incorporated.  Twelve years ago, give or take, I put quite a bit of my personal money into the retailer, which at the time owned a collection of other department stores in addition to the famous eponymous flagship Saks Fifth Avenue.  I think I paid somewhere around $8 per share and sold the stock a year or so later for $12, pocketing a hefty 50% return on my initial cash investment in only twelve months.

Why didn’t I hold Saks indefinitely?  I loved the store, especially during my years living on the East Coast in the New York City area.  Still, it wasn’t rolling out new locations, it wasn’t a big dividend generator, and it had reached my full estimation of its intrinsic value.  In the more than a decade that has passed, I haven’t made a substantial investment in the stock at any time since, although I do have a framed stock certificate on the wall at headquarters, along with about 100 other companies that mean something to me.  Over that same time period, the shares haven’t moved.  They have been stuck in limbo, doing nothing for owners.

(There would have been a big opportunity to make money during the credit crisis when the stock went from $2 to $10 but I was pouring our capital into shares of companies that I want to hold forever that had the same discounts to intrinsic value; e.g., Wells Fargo at $8, U.S. Bancorp at $8.50, General Electric at $6, Berkshire Hathaway at $56 (adjusted for splits), Cracker Barrel at $19, Harley Davidson at $10 … the list goes on and on.  That way, when they recovered, not all of them would have to be sold. We could leave them in our accounts and let them compound indefinitely.)

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