Dave Sather, President of Sather Financial Group in Victoria, Texas, has been an exemplary mentor to the value investing community. He not only teaches value investing at Texas Lutheran University, but he has also shared his wisdom in numerous interviews with The Manual of Ideas and presentations at ValueConferences events. Dave is an instructor at the upcoming Wide-Moat Investing Summit 2016 (fully online) and Latticework 2016 (sold out).
Eat ’em, Drink ’em…
Distilling the essence of investing into just one sentence is a formidable task. It would be wonderful to know all there is to know about investing by studying a single sentence, but no such silver bullet exists. Nonetheless, some pithy pieces of advice do encompass much of what makes investment success possible. Consider Buffett’s two-rule admonition not to lose money. Or his advice to “be greedy when others are fearful, and be fearful when others are greedy.” In my view, this latter statement encapsulates as well as any one sentence the essence of successful investing.
Dave Sather reminded us of another pithy piece of investment wisdom in an exclusive conversation in Omaha, Nebraska. According to Dave, an old Texan piece of stock market wisdom goes as follows: “Eat ’em, drink ’em, smoke ’em, go to the doctor, and look good when you get there.” In the interview excerpt below, Dave explains the significance of this statement. As simple as the advice may sound, it artfully focuses the investor’s attention on companies that tend to be non-cyclical in nature, as they provide products or services that consumers desire in times good and bad.
Dave’s investment approach has succeeded in part because of his focus on businesses with durable competitive advantage. As part this strategy, Dave sometimes writes put options that provide current income while setting a below-market price at which he would gladly buy selected high-quality companies. Dave addresses this strategy briefly in the following excerpt as well. Other value investors who have successfully employed options strategies to generate income include Barry Pasikov of Hazelton Capital Partners and Zeke Ashton of Centaur Capital. Zeke authored an exclusive piece on value investing strategies using options for The Manual of Ideas.
Watch Dave Sather share his wide-moat investing wisdom:
Knowing When to Sell
On another occasion, we sat down with Dave to discuss the often-wrenching decision of when to sell an investment. As he reminds us, much of investing discourse tends to be focused on the buy decision. However, knowing when to sell is an essential component of every sound investment process. In order to learn more about the intricacies of the decision to sell, and help us improve our investment process, we include below an exclusive video lecture excerpt. Here are some of the highlights form this thought leader session:
Reverse Engineering the Margin of Safety
The sell process is as much art as science. As investors we often fall in love with certain positions, especially if they have done well. As we are not always rational human beings, we have to be mindful of logic and not allow past performance to keep us in an investment longer than it should. The concept of margin of safety is again very helpful in this context. States Dave Sather:
All we’re trying to do is reverse engineer the margin of safety concept. When the margin of safety becomes large we all run to buy. But when the margin of safety becomes too small that needs to be the type of thing that in your head says we really need to evaluate selling this even if it’s done very well.
Knowing When to Sell Starts Before You Buy
Following from the above, the decision to sell really has to start by assessing the nature of an existing investment. Is the investment a long-term compounder that grows intrinsic value over time, or is it a trade, perhaps a special situation characterized by a large discount to a relatively static intrinsic value, with a short-term catalyst to closing the gap to intrinsic value. The nature of the investment, in fact, determines the thought process behind the decision to sell. As Dave explains:
If it’s a trade, you’ve got to really focus on the valuation gap, meaning that, if the gap closes very quickly you’ve got to be willing to move along. If you are getting close to full value, or fair value, and you stay beyond that, really all you’re doing is gambling at that point, you’re speculating, hoping that something will go up…If it’s going to be a long term hold in your portfolio [a compounder], first you’ve got to sit down and ask yourself, what’s the competitive moat that’s around this?
This reminds us of the importance of focusing on the relevant value driver(s) for each investment. If it’s a cash-rich company selling below net cash, an investor may want to inquire about how likely it is that insiders will return the cash to shareholders. Asking about the moat of the company’s business may be question #12 on your investment checklist — it is hardly the most important question to focus on in such a situation. Conversely, if we’re analyzing a compounder that benefits from network effects, asking about tangible asset protection would be missing the point. Dave rightly points out that in such a situation, evaluating the company’s competitive moat, whether it is growing or declining, should be a priority for any investor deciding what to do.
So, knowing when to sell really starts before you buy. It goes to the heart of why you thought a situation was worthy of research in the first place and what is the nature of the investment itself.
In the exclusive 50-minute video lecture and Q&A, Dave Sather discusses in more detail the above and other considerations relevant to the sell decision. Some of the other considerations include:
- Sell Triggers: Dave reveals actual investing case studies experienced over the last 20 years of managing money (case studies include: AIG, Coca-Cola, Fannie Mae/Freddie Mac, Cemex, Paychex, Gannett, Furniture Brands, Kimberly Clark and others)
- Valuation Considerations: favorite valuation metrics and what to avoid
- Taxes: considered from a U.S. taxpayer’s perspective
- Execution: the decision to sell in the context of trading and portfolio management
Dave Sather on the Decision to Sell (excerpt)
Dave Sather is an instructor at Wide-Moat Investing Summit 2016, where he will present his favorite wide-moat investment idea.