This post has come out of a few discussions with investors over the past few months and some introspection on my part as to how I want to run my portfolio. I've come up with two analogies on how I think most investors tend to act with regards to their portfolio. Neither is right or wrong, they're just different.
The Merchant
The merchant is always thinking about the sale price when they buy a product, there are labor costs, overhead costs and lastly no one wants to buy a stale product. The merchant's store needs to be constantly turning over inventory to make a profit, and carrying odd or rarely purchased inventory just takes up valuable shelf space.
Who is the merchant in the investing world? The merchant investor has the sale of a stock in mind when they purchase it. If it goes up and hits their target price in a day they'd dump it without a second thought. The merchant investor only wants to have stocks in their portfolio they can liquidate quickly, they're not interested in holding anything that they might have trouble selling.
The merchant is willing to buy anything if they know they can resell it later for a profit. The merchant investor can't afford to be patient, they need to constantly be turning over their inventory to make a profit, stocks that sit around too long are "dead money" and need to be dumped. Merchant investors are also worried about leaving a good impression on their customers, clients that aren't happy with their inventory will go to a different merchant to satisfy their needs.
The Collector
The collector is focused on adding to their collection without any thought on how they might get rid of the new addition. The collector is patient and is looking for items they cherish. Maybe the newest item is found at a garage sale and needs to be dusted off, cleaned up and framed for display, the collector doesn't care. They're willing to work on the collection a bit to make it something they're proud of. Of course a collector is always willing to part with an item given a fair price or a generous price, but they thoughtfully consider the sale. They consider what it would be like to look at their collection each day and realize that prized item is missing, could they use the sale proceeds to buy something better?
Who is the collector investor? The collector investor carefully considers the addition of each stock to their portfolio. They search for something that's just the right fit to their collection and will pass over many good stocks that aren't the perfect fit. The collector investor isn't worried about selling, they'll buy a company and hold onto it for years. The collector investor isn't worried about liquidity, if a company is worthy of being in their collection they'll find a place and be happy to keep it for years as it grows.
The collector doesn't limit themselves to only obscure treasure pieces for their collection, they will also pick up items they know are in demand that they can get at a very attractive price. The difference between the collector and merchant is patience. If a fair price for an attractive piece isn't reached in six months or a year they'll continue to hold until a willing buyer appears with a fair price.
The collector is also emotionally attached to their collection, and why wouldn't they be? The merchant only cares about their profit margin at the end of the day, but the collector is picking out items they will be living with for years. The collector investor begins a relationship with a company they hold, through years of holding they learn more about the company and experience ups and downs with it.
Who are the collectors and merchants?
I think unfortunately most professional investors and most of Wall Street falls into the category of merchant investors. They are only worried about reporting good performance numbers at the end of the day. Unfortunately most Americans are happy to invest with merchants as well because they want to put their money with the person who's doing the best right now, not over the long term. Merchant investors are happy to buy a stock with 20% upside, and turn things over every few months.
The collector investors are an eclectic group, some value investors fit this mold. The old Tweedy Browne was a collector for sure, Warren Buffett is definitely a collector, and Ben Graham seemed to have some of it in him as well. Some modern value investors are more merchants, buying and selling what's undervalued and in vogue today. The type of investor who is willing to buy and collect businesses is rare, very rare.
I've been reading the book The Money Masters which talks about Warren Buffet, Ben Graham and Tweedy Browne amongst some other investors back in the 1970s. The collector mindset has really struck me, Tweedy Browne would buy batches of illiquid stocks and hold them for decades patiently waiting for the right buyer to come along. Buffett is similar, but he's taken it a step further, he has decided he enjoys collecting to much he will never sell anything.
I desire to be a collector investor. This means at times my collection might be lean, maybe only a handful of stocks, but other times it might be full of great items I can't imagine selling. The biggest difference between the merchant and collector is patience. The merchant is always worried about the sale, the collector is content to hold something forever if need be, or is patient enough to wait for the correct buyer in due time.
I think all investors could benefit if they adopt the collector mindset.
Talk to Nate
Great analogy. Like most investors I expect, I think I'm a bit of both. I have a core of collected stalwarts that is growing, and I expect to hold for a long time and a periphery of turnarounds that I expect to sell once they've recovered.
ReplyDeleteI think the longer you are in the market and the more you get to know it, the more likely it is the majority of your positions will be of the collected variety!
I am reminded of the "trading sardines" analogy in Margin of Safety!
ReplyDeleteJonathan
I think thinking about oneself as a collector is useful in terms of how one should think about approaching good companies. On the other hand, I think to operate solely within the collector spectrum would be severely limiting. Value investing inst just about picking great companies, its about buying things selling well below their intrinsic value. Said things could be companies, or even derivatives, and often times they are not what one would consider a "good" company (There's money in s*it) . That being said, if you can beat the averages thinking of yourself as a collector there's no need to change.
ReplyDeleteI don't know quite whether either mindset is perfect, but this brings up an interesting(if slightly off topic) concept I've been thinking of. I call it "Buy Price Bias" but essentially the idea is, prior to purchasing a stock, price is everything(well almost everything...you get the idea), but after purchasing, buy price should be absolutely irrelevant. In fact, I think if you could erase the buy price from your brain, an investor would do better off. It's that "collector attitude" that you shouldn't be waiting to sell, but rather selling if the moment calls for it. The ideal I guess would be to have a two man business, one person takes care of buying and the other takes care of selling(without knowing what the buy price is).
ReplyDelete