Patience Pays in Stocks

Dear Reader,

Today, I'd like to share some insights about a critical aspect of investing: knowing when to hold on to your winners. Let's dive into some examples from well-known value investors: Warren Buffett and Mohnish Pabrai.

Warren Buffett and Disney: An iconic example of selling too soon comes from Warren Buffett himself. Buffett bought a 5% stake in Disney back in 1966 for $4 million. Despite the shares more than doubling in value by 1995, Buffett sold his stake a year after buying it, netting a 55% profit. He again received a 3.6% stake in Disney after Disney's acquisition of Capital Cities/ABC in 1995, one of Berkshire Hathaway's key holdings. Yet, he sold his shares within three years. If Buffett had held onto his combined 8.6% stake in Disney, it would now be worth more than $21 billion, and he would have also received north of $1.5 billion in dividends. In total, Buffett's decision to sell Disney twice potentially cost him a return of $20 billion​​.

Mohnish Pabrai and Fiat Chrysler: Mohnish Pabrai, another prominent value investor, bought shares in Fiat Chrysler around $6 per share in 2012. While Pabrai raked in significant profits from Fiat, his decision to sell his shares in Ferrari after Fiat's spin-off turned out to be a missed opportunity. Despite this, the dividends from Fiat alone were set to return his entire investment by 2021​​.

These examples underscore the importance of five key points:

• Patience: Investing is a long-term game. Quick profits might seem enticing, but the real wealth is often generated over many years or even decades.

• Belief in the Business: Confidence in the long-term prospects of a company is essential. If you believe in the business and its growth story, hold your stake.

• Management: Look for companies with competent and honest management. Their decisions can significantly impact the company's value.

• Valuation: Ensure that you are buying at a reasonable price. Even the best company is not a good investment if you pay too much for it.

• Review, not React: Continually review your investments based on their performance and your investment thesis. However, avoid reacting impulsively to short-term market volatility.

In conclusion, selling winners can sometimes rob us of the most significant potential gains. It's crucial to remember that patience and a long-term perspective are often rewarded in the world of investing. Therefore, before you decide to sell your winners, remember the stories of Buffett, Disney, Pabrai, and Fiat Chrysler.

Until next time, keep investing wisely!