Qualiport

[ August 21, 2000 ]

We Were Wrong

By Bruce Jackson (TMFGoogly)

We've got it all wrong. The Foolish investing mantra of "long-term-buy-and-hold" is baloney. We've missed one very important component which should be part of any investing strategy. It's called selling.

In various parts of the site, the Qualiport is promoted as "Our buy-and-hold (and hold and hold) portfolio." Yet we've proven that statement to be wrong, as we've sold 3 holdings in just under three years -- Marks & Spencer (LSE: MKS), Rentokil Initial (LSE: RTO) and Unilever (LSE: ULVR). So much for "hold and hold"!

In simple terms, we've suggested selling when:

- you realise you've made a mistake by buying the shares in the first place.
- the company's story has changed for the worse.
- you've got a better investment opportunity for your money.
- the company dominates your portfolio, giving you that uncomfortable feeling.
- you need the money.

(These are explained in more depth in the Motley Fool UK Investment Workbook).

Those criteria cover just about every eventuality. But I'd be tempted to add one more:

- the company becomes fully valued.

That sixth reason is arguably the most controversial. It's certainly the hardest one to measure. The art of valuing shares is so imprecise and subjective that "fully valued" is almost impossible to define. For example, one company may be undervalued at a price to earnings ratio (P/E) of 60 whilst another may be overvalued on a P/E of 20. But that doesn't mean you can't have a go at it.

Buy On The Glitch

I've written before about buying companies on the glitch. Most companies, at some time during their long corporate development, go through bad patches. Provided you're still looking at a very good company, that is the exact time to buy. Kenneth Fisher in his book Super Stocks says this, and he's certainly not alone.

Warren Buffett is best known for his long-term investment in Coca-Cola (NYSE: KO). When he bought Coke, the shares were not considered particularly cheap. At the time, many thought Buffett had deserted his value-oriented roots, and given his buy price, the Coca-Cola purchase would prove to be mediocre. How wrong the critics were proven, and how versatile an investor this proved Buffett to be.

(For anyone interested in the real reason Buffett invested in Coca-Cola, a read of I'd Like The World To Buy A Coke -- The Life and Leadership of Roberto Goizueta will give you a very good idea. In a nutshell, Buffett recognised Coke's huge international growth potential, especially in the old Eastern Bloc.)

Exceptions and Rules

But Coke was very much the exception rather than the rule for Buffett. He usually looks to buy good companies at reasonable prices, and reasonable prices often occur during a "glitch". Coke was not in a glitch situation when Buffett first bought the shares.

Buffett's planned holding period for Coke is forever. However, by far the majority of his equity investments will be sold. Again, Coke is the exception rather than the rule. Investors trying to emulate Buffett's investment philosophies fail to take that into account. They think of every investment as being in Coca-Cola, when in fact there is only one Coke. In the words of their marketing department, "Coke Is It". In my words, "Don't Confuse Every Company For Coke". I don't work in the Motley Fool's marketing department!

Buffett's investment in Coca-Cola is one of the few ideal investing scenarios -- buying a great company at a reasonable price and holding the shares forever. Unfortunately, these situations are very few and far between. In fact, you may go through your whole investing life without ever finding one. Of the current Qualiport shares, PizzaExpress (LSE: PIZ) is an example of a company that just maybe is on the cusp of something big, but only if its fledgling international operation really takes off. The shares are currently reasonably priced. But they are no Coca-Cola, and almost certainly will never get close to being one.

Selling On The Euphoria

Given that 99.5% of companies should never be held forever, stating the bleeding obvious, they therefore need to be sold. If we're aiming to "buy on the glitch", we should also be aiming to "sell on the euphoria". I'd also add that for 99.5% of investments, the holding timeframe is irrelevant, the 0.5% being the Coca-Cola type "hold forever" exceptions.

So, if after 3 months a company went from undervalued to overvalued, sell it. This will be very rare, especially as the Qualiport will still be looking to buy quality companies. But selling after, say, a two-year holding period could become more common.

Sell Misys?

Maynard's article on Friday again cast doubt over the business model of Misys (LSE: MSY). Although we didn't buy Misys on the glitch, the shares certainly experienced euphoria. They amazingly hit 1259p in February this year, but the Qualiport sat on its selling hands. It was a missed opportunity, but it's also no use crying over spilt milk.

At about 730p, Misys now trade on a forecast P/E of 40. Whilst that's not in the euphoria league, it's certainly not cheap. Given Maynard's doubts over Misys' business model, is this a selling opportunity? Misys is definitely no Coca-Cola.

Your Turn

Cast your vote in this poll.

Should the Qualiport sell Misys?

a. Yes -- sell at any price
b. Yes -- sell at 730p and above
c. Yes -- sell at 830p and above
d. No -- they are Coca-Cola in disguise
e. No -- stick to hold and hold and hold

Feel free to add to your thoughts on the Qualiport discussion board.

Where Next
• Misys On Chopping Block (Qualiport)
• Qualiport trading history, including the reasoning behind dumping M&S, Rentokil and Unilever.
• The Glitch (Qualiport)
• How To Value Shares (Fool's School)
• Super Stocks (Book)
• I'd Like The World To Buy A Coke -- The Life and Leadership of Roberto Goizueta (Book)