Inactivity and Business Evolution

One of my good friends Peter Lindmark who runs Lindmark Capital writes occasionally over at gurufocus. I especially liked his latest writeup entitled Inactivity and Business Evolution and highly recommend it. I admit my portfolio probably turns way to much and I probably sell way to early after a decent gain. Anyway very insightful.

http://www.gurufocus.com/news.php?id=14681

Few takeaways.

According to John Bogle’s research, only 35% of money managers beat the market in any given year. This number drops to 25% over 10-year periods, 10% for 25 years, and 5% over 50 year periods.

and

According to John Bogle’s research, managed funds average turnover rate is 110% a year versus a zero turnover from a passively owned index fund. Multiple studies have been done with results showing that low turnover investment strategies perform significantly better over time.

and

Mohnish Pabrai has been very successful in implementing a rule to avoid switching costs. He talks about it in Chapter 15 of his book The Dhando Investor. His rule states: “ Any stock that you buy cannot be sold at a loss within two to three years of buying it unless you can say with a high degree of certainty that current intrinsic value is less than the current price the market is offering.” Therefore, Mr. Pabrai has held stocks through significant periods of volatility; only selling before two years if he is certain intrinsic value is below the current stock price. If he is unable to assess the intrinsic value with any certainty he simply hangs on until he has a clear view of intrinsic value. His rule help him lower commissions, taxes, and most importantly they help him avoid switching out of businesses before the intrinsic value is recognized in the marketplace.

and

There is an increased probability of error when looking at stocks when stocks are setting new highs. Mr. Pabrai wrote an excellent article entitled “Buffett Succeeds at Nothing”, explaining how Mr. Buffett plays bridge, and Mr. Munger works on his mental models to fill the time periods of lofty security valuations. One should challenge themselves to delay decisions at least one day, as this is an effective tool to help an investor make sound decision. As Mr. Buffett states “ It is better to do nothing at all than to do something stupid.”

My outlet is Yahoo spades....Finally

How often should investors review their investment positions then? Mohnish Pabrai updates his investment ideas once a quarter or whenever there is meaningful news.............This seems so infrequent in an age where data flows quickly through the internet. However, behavioral finance suggests that thirteen months is the optimal time frame to reassess one’s portfolio.

Well written Peter.