Published July 18th, 2015
“Assiduity is the ability to sit on your ass and do nothing until a great opportunities presents itself”
– Charlie Munger
Charlie Munger is Warren Buffett’s right-hand-man. Munger is known for his quotable investing wisdom. The above quote talks about not doing anything until a great opportunity presents itself.
Once a great opportunity has presented itself – and you’ve purchased the stock – what do you do?
The answer is at once incredibly simple and incredibly difficult to follow:
Doing nothing is a core principle of both dividend growth investing and the Buffett-Munger approach to buying high quality businesses trading at fair or better prices.
When you buy a high quality business, all you have to do is sit back and let it compound your wealth. Case-in-point: the amazing 25-year total returns of these 9 Dividend Aristocrats (and the strong performance of the Dividend Aristocrats in general).
Growth is not linear, even in high quality businesses with strong competitive advantages. There are very few businesses that grow earnings-per-share every year. Johnson & Johnson’s (JNJ) streak of 31 years of consecutive earnings increases is an extreme outlier, not the rule.
Most people can agree that Coca-Cola (KO) is a high quality business. The company sells non-alcoholic beverages and has 20 brands that generate over $1 billion a year in sales. Even though the company has a strong and durable competitive advantage in a slow changing industry – it doesn’t generate earnings-per-share growth each and every year. Note the facts below:
- Coca-Cola has compounded earnings-per-share at 7.2% a year over the last decade
- Earnings-per-share declined in 2009
- Earnings-per-share declined in 2014
Coca-Cola is one of Warren Buffett’s largest holdings. Do you think Warren Buffett sold in 2009 or 2014? Of course not. Business results naturally fluctuate. As long as a business keeps its competitive advantage, and keeps rewarding shareholders with dividends, it should not be sold.
Over scrutinizing the company’s latest quarterly earnings report will do you no good. It will only result in stress and second guessing well-reasoned buy decisions.
This doesn’t mean to fall asleep at the wheel and blindly assume all your stocks will continue growing indefinitely. Things do change over time. What is important is verifying that the businesses in which you invest maintain (or improve) their competitive advantages. When a business loses its competitive advantage then it is time to sell.
Individual Investors Tend to Sell at the Wrong Time
In the landmark study The Behavior of Individual Investors by Brad Barber and Terrance ODean the unfortunate truth about selling stocks was revealed.
Barber and Odean analyzed data from 78,000 individual investors. They found that when individual investors sell a stock and buy a new stock, the stock they sold outperforms the stock they purchased, on average. This means we tend to buy and sell at the wrong times.
What’s the solution? Don’t sell stocks without a very good reason. Price declines are not a good reason. When a stock’s price declines, you can buy more for a better deal (assuming the underlying business has not significantly changed).
Buy & Hold Investing
“Our favorite holding period is forever”
– Warren Buffett
It’s no secret that Warren Buffett is a long-term investor. The holding periods for 3 of his largest positions are shown below:
- Wells Fargo (WFC) – first purchased in 1989
- Coca-Cola (KO) – first purchased in 1988
- American Express (AXP) – first purchased in 1964
Buying and holding gives investors a psychological edge. When one focuses on buying and holding a stock for the long-run, different aspects of the business are analyzed. The durability and strength of a company’s competitive advantage becomes the primary buy/sell criteria, combined with how friendly the company’s management is to shareholders.
Recent price history becomes much less important when holding periods are measured in years rather than days or months. Buy and hold investing also reduces trading costs.
Every time you buy or sell a stock, you incur costs. When you buy a stock, you must pay the brokerage commission of $5 to $10. Additionally, you could incur other execution costs like slippage. These may seem like minor costs, but they add up over time.
Selling incurs all the same costs as buying, but with one added cost thrown in: taxes. If your investment increased in value, selling triggers capital gains taxes. When you don’t sell, the money you would pay as taxes is allowed to continue compounding in the business – tax-free (until you do eventually sell).
The less trading you do, more money stays in your account to compound, and less of your money goes to Wall Street broker/dealers and Uncle Sam.
The Art of Doing Nothing
The truth is, it is hard to do nothing. It is easier to buy and sell stocks. All of the activity gives us the illusion that we are in control. In reality, doing less in investing is being in control.
It is much easier to sleep at night knowing you are invested in high quality businesses that you are comfortable holding for the long run. The Dividend Aristocrats Index is an excellent place to start looking for such high quality businesses.