In this video Chief Investment Officer Steve Johnson talks to International Shares Fund portfolio manager Gareth Brown about knowing when, if ever, to sell a high performing stock. Although turnover of stocks in the International Shares Fund portfolio has been extremely high relative to history over the last 12 months, there have been a few important exceptions like Blancco, Zebra Technologies, and Motorpoint.
Hi and welcome, it’s Steve Johnson here, Chief Investment Officer at Forager Funds, and I’m joined by Portfolio Manager of our International Fund, Gareth Brown. Today we’re going to talk about selling stocks and particularly selling stocks that you think are great businesses. When is the right time to do that?
I’ve written quite a lengthy piece in our quarterly report about some of the things that I think we have historically got wrong and mistakes that people make. But Gareth you’re someone that tends to and has historically held stocks for a very long period of time. I think you’ve still got a couple in your portfolio that you’ve actually held for decades. Can you maybe talk us through how you think about some of those great businesses that you’ve held for a long time.
I haven’t bought a share directly since 2012 since I moved over to Forager. So I haven’t been able to buy shares, all my new investments have gone into either of our Funds but I do own three or four stocks that I’ve held for longer than 10 years. ARB is one that I’ve owned since about 2001, it’s gone up more than 20 times since I bought it back then 20 years ago and obviously it’s paid dividends as well and special dividends. It’s been a great case study in the power of compounding and also that concept of an interest free loan from the tax man.
So I could sell up at any point at the moment and I would have to pay capital gains tax on the bulk of the proceeds, or I can leave that money with the Brown Brothers who have done a very good job over the last few decades and hopefully have a few more years in them yet.
One of the things we’ve struggled with in the International Fund over the past couple of years, and it’s a good problem, but you talk about a 20 fold return on ARB over a couple of decades. We’ve had stocks in the portfolio that are up five and ten fold in the space of 12 months. I think one of the easier things about an ARB has been the business has compounded along with the share price over the time. Has it ever looked stupidly expensive?
It’s certainly helped that it has never gotten ridiculously far ahead of itself. Charlie Munger says something along the lines of, it’s hard to pay too high a price for a wonderful business, and I think that applies here and I think it particularly applies to non-promotional management teams that don’t tend to let their stocks run too far ahead of themselves. ARB has gotten probably a little bit ahead of itself, maybe three or four times over the last few decades. But they’ve always gone and grown out of that problem relatively quickly and easily. I think there’s probably been a couple of occasions where I might’ve chosen to optimize my portfolio and sold out and probably should have, but it’s it’s worked very well so far and I’m not sure I hold it purely for financial reasons anymore. I’m quite loyal to it.
I’ve really tried to incorporate that thinking into our portfolio more over the past couple of years, we’ve got some wonderful businesses in the portfolio and I think that’s been partly a change with team composition as well. But I still look at the portfolio and the turnover has been extremely high relative to history over the past 12 months.
There’s been a couple of important exceptions. Blanco that we’ve owned now for quite a few years, that whether the stock has grown into its valuation at each step along the way. Stocks like Zebra and Motorpoint, where we’ve held them for a few years now and I feel like they’ve probably got everything in place to hold them for a bunch of years if the valuation doesn’t get too far ahead of itself. I think it’s really important to understand that the turnover has been massive because of the volatility we’ve had this year. We’ve been buying stocks at a deep discount to where we think fair value is. It closes that gap and then some in a matter of weeks and months. That volatility has been part of it, the other part of it here is the opportunity set. One things rocketed, but we’ve found other places to put money to work. So the idea here is to always try and earn the best risk adjusted returns and investors should expect us to do that and in an environment like 2020 and early 2021, it’s been optimal to turn the portfolio over more than usual.
We won’t be loyal to stocks like I have with ARB within the portfolio, the aim is always highest risk adjusted returns.
Like you mentioned, we’ve got a couple of those businesses, like Zebra in the portfolio. Yes, we’ve sold some shares there over the past 12 months, but we think that is a good example of the business value growing alongside the share price. That’s the main lesson for me out of all of this is that value of a business, it’s not a static thing. I think the main mistake you make is, the share price is up therefore I sell. You’ll first want to ask yourself a question: Was my estimate of the value of this business right when we first bought the stock? What’s changed since then, and how much do I think it is worth today? And constantly be thinking of the value itself as something that’s dynamic and where you’re constantly trying to update it and get it right for what’s in front of you rather than what’s behind you.
I think also just recognize the power of good management, the power of the intangible element of some businesses, competitive position and the likes. There are certain businesses you want to give more leeway to than others.
Hopefully you’ll see some of those stay in our portfolio for a very long period of time and our wealth grow alongside the value of the business. Thanks for tuning in.
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