Just Hold the Goddamn Stock!
Charlie Munger's solution to estate planning at Berkshire was simple: Just Hold the Goddamn Stock! Unfortunately, his advice is not easy to follow.
“At Berkshire we have a simple problem of estate planning. Just hold the goddamn stock.”
— Charlie Munger, 2023 Berkshire Hathaway Annual Meeting
Charlie Munger always said that his goal was to find businesses that he could buy and hold forever, with no thought of any “exit strategy.” That was certainly the case for his large holdings in Berkshire Hathaway and Costco. Although Mr. Munger’s holdings of Berkshire Hathaway declined significantly over the final quarter century of his life, this was due to his generosity giving away shares rather than personal consumption or a desire to “optimize” his portfolio. During this time, Berkshire Hathaway rarely seemed expensive, but Costco has long traded at a high valuation, yet he just kept holding the stock.
Earlier this year, I wrote Too Clever By Half, an article that was critical of Berkshire Hathaway shareholders who seemed to be a bit too focused on trading the stock after it experienced a significant rally around the time the 2023 annual report was published.
I concluded by asking what Charlie Munger would think about this sort of behavior:
“If you are tempted to gamble in the stock market, especially using Berkshire’s stock as the vehicle, simply picture Charlie Munger with a look of mild disapproval and slight amusement, slowly shaking his head. I think that’s a useful mental model!”
Although I do not like to write about my investment activities, which is the main reason I no longer publish a paid newsletter, intellectual humility compels me to admit that I recently fell victim to the type of behavior I criticized earlier this year!
Toward the end of August, as Berkshire’s market capitalization vaulted past $1 trillion, I sold a material number of long-held shares within my retirement accounts, reasoning that the stock was clearly trading at a rich valuation compared to where it has typically traded over the past fifteen years. The vast majority of my Berkshire stock is held in my taxable accounts so I would still have a great deal of “skin in the game.” In fact, the capital gains embedded in those shares in my taxable account makes me unlikely to sell them during my lifetime, assuming the step-up in basis at death remains in the United States tax code.
I reasoned that I could execute this transaction within my retirement accounts without tax consequences. Additionally, the value of my retirement account has reached the point where I have clearly “won the game.” With twenty-four years left before I must begin required minimum distributions from my Traditional IRA, even a modest real rate of return going forward would provide far more income in retirement than I anticipate needing. In addition, I kept thinking of this quote in Warren Buffett’s 2023 annual letter:
“There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. Some we can value; some we can’t. And, if we can, they have to be attractively priced. Outside the U.S., there are essentially no candidates that are meaningful options for capital deployment at Berkshire. All in all, we have no possibility of eye-popping performance.”
This echoes what Warren Buffett has stated many times in recent years. Berkshire’s future will look nothing like the past in terms of outperforming the overall market, and any outperformance will be modest. Therefore, it would follow that Berkshire trading at a relatively rich valuation might not be expected to outperform the market.
So, I sold a significant number of my shares and suddenly had a pile of cash. There is nothing wrong with holding cash. After all, Warren Buffett is likely to have nearly $300 billion of cash on Berkshire’s balance sheet as we approach the end of the third quarter. This cash represents valuable optionality for Mr. Buffett and he has a sixty year track record of outstanding capital deployment at Berkshire.
The problem is that cash in my hands does not represent the type of optionality that it represents in Warren Buffett’s hands. I have the advantage of a much larger universe of investments, but I have far less skill and inclination to turn over every rock. Mr. Buffett famously read every page in the Moody’s Manual as a young man. Very few investors have ever done this type of due diligence. I attempted to do so as a young man and failed, and I certainly would fail in middle age. I have neither the time nor the inclination to spend my time entirely focused on security selection, and I would be playing a game against fanatics who find nothing more riveting than opening a 10-K on a Saturday morning. These days, I’d rather be reading Sophocles.
I know a handful of companies very well, but none of them appear to offer better return prospects than Berkshire offers, even at a rich valuation. In fact, most are clearly inferior. I could choose to invest in an index fund, but the overall market is hardly a bargain. At current levels, the market seems to be even more expensive than when I wrote an article on the subject early this year. In addition, at Berkshire we have management that is totally aligned with shareholders, without outrageous compensation plans, compensation consultants, and the like.
When mistakes are made, Warren Buffett suffers most of all. Most importantly, I know that the possibility of malfeasance at Berkshire is vanishingly small. Berkshire is also a broadly diversified investment vehicle akin to a “mini index” of companies hand-picked by a master capital allocator. At ninety-four, Mr. Buffett will not be around forever, but his successors are as well equipped to “keep the culture” as possible.
It is also worthwhile to consider what it means when we take Charlie Munger’s advice to “just hold the goddamn stock” even when it might seem expensive. For example, let’s say that a stock is trading at $115 and the investor estimates its intrinsic value to be $100. This is a static picture at a moment in time. If the investor expects that the intrinsic value of the stock will compound at 10% over the next seven years, intrinsic value would be around $200 in 2031. If we assume that the stock will trade at intrinsic value in 2031, that means that your $115 investment today will appreciate to $200 over seven years, a compound annual return of 8.2%. By holding an “overvalued” investment, you would compound at “only” 8.2% rather than 10% over this period. Is this the end of the world? Clearly not.
Of course, if you believe that you own a stock that is trading at $200 that is only worth $100, you would anticipate earning no return at all over seven years if it compounds at 10% and trades at intrinsic value in 2031. That is a different situation than a mild 15% overvaluation. By using these figures, I am not suggesting that Berkshire was 15% overvalued in late August, or that it will necessarily compound intrinsic value at 10% over the next seven years. The point is that when you own an excellent business with a proven track record of delivering growth of intrinsic value, paying too much attention to the stock price is counterproductive.
Haunted by Charlie Munger’s admonition, I dwelled on the wisdom of my decision over the past few weeks and finally concluded that I was wrong to sell any shares in late August. I have no good ideas for the cash that was sitting in my account among companies that I know well, nor did I have the inclination to treat the search for fresh ideas as the full-time job that it really is. I had no appetite for investing in index funds. And sitting on cash simply to wait for a better entry point back into Berkshire seemed too much like market timing. As a result, I repurchased the shares last week that I sold in late August. Fortunately, I was able to purchase the shares at a weighted average price that was about 1.5% lower than the price at which I sold shares so I “came out ahead.” I also earned interest at a ~5% annual yield on the cash for nearly a month.
Unfortunately, I did not really “come out ahead” because of the brain damage associated with this situation. I created needless stress when I should have just been “sitting on my ass” when it comes to my investment in Berkshire. Worst of all, since this situation was “profitable” I might be tempted into doing it again someday. I don’t think that I will attempt something like this again, but neither did I think that I would go down this path when I wrote Too Clever By Half earlier this year! I thought that only other people could be too clever, not that I was writing about my future self.
Investors are often their own worst enemies because human psychology comes into play. You can arm yourself with all of the best information on how to counter psychological impulses and still fall victim to these traps. My overall investment career has included many mistakes, but the worst whoppers was mistakes of omission, particularly in Apple and Microsoft. I have suffered few material losses. Nevertheless, I am not immune to mistakes. The events of the past few weeks were a sobering reminder of the stupidity that we can all be susceptible to. Writing about this situation is not pleasant, but if I’m going to be critical of others, intellectual honestly requires a certain level of self-criticism when warranted.
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Individuals associated with The Rational Walk own shares of Berkshire Hathaway.