The word Margin of Safety is linked to the time frame too. Omg amusing or confusing?
Well if you see a share at Rs. 50, and you think it has a value of Rs. 100, and it doubles in one year, you have got 100% return. Suppose your target was 16%, what happens if you sell? Say you sell for Rs. 100 and put it in the index fund and earn 12% for the next few years (Index return) you may be achieving your target!!!
Did I confuse you? well, that’s NOT the purpose.
If your share doubles in say 5 years, the MARGIN OF SAFETY did not help!! So the higher the margin, higher the chance of achieving your target. My take is – knowing when to sell is the REAL CHALLENGE. Most value investors can be accused of selling too early. We buy at Rs. 50, and sell at Rs. 100. Great…but what if it goes up to Rs. 200. 300. 500, 1000 and 1900 over the next 10 years…do you wonder that you should have done?
More than getting the MoS (Margin of Safety) how long we have it, and how long we decide to keep it is the real challenge. So you bought this Rs. 50 priced share and it became Rs. 100 in 6 years. What have you got? well about 12% p.a. return. That is way below your target of 16%. So yes, you got the margin of safety but it got squandered. This means you need to see the Price – Value gap on a regular basis. Suppose at the end of year one, the share has gone up by 17%, CHECK whether the value has also gone up by ATLEAST 17% – or thereabouts. If it has, then it continues to be a value share. If the value has gone down (your research) and the price has gone up, pause. Maybe this is a share worth selling – because it goes against your core Price-Value gap. Tough to understand?
Imagine teaching this in a class. Please feel for me.
So did the ‘value’ nature of this share disappear after 6 years? well, no. If you see your value portfolio only about 40% of the number of shares really perform. Well for me it is so. So the shares that perform have to do much better than the average to compensate for the dull heads. That makes it more difficult and tougher.
Anyway in 4 years most shares will have to be got rid off – either because they have achieved the targets or because they will NOT achieve the target. Or of course you can have different targets for different shares. You may decide that I will hold on to TaMo for 8 years before I decide (amazing bias) or I will ignore market negativity for 3 years (Dhfl). Both are clearly shares on which YOU are breaking your own rules. Stupid maybe, but sometimes you have to break the rules. The important thing is that you have rules and you are breaking them knowingly.
The only Value Investor whom I have seen laying emphasis on the ‘time’ for holding is of course the guru – Benjamin Graham. He says give it a 2/3 year kinda time frame. Thus even though WB says period of holding should be ‘forever’ I feel one has to do an annual review and that has to be disapassionate. However, I tend to be on WB side rather than on BG’s side. I have Gillette that I have had for a long time – but I guess at best I must have matched the sensex since the 1990s. Looks like an extraordinary kinda return, but when n is very long, r tends to be not too high. Actually for me it does not matter – I am not a big team. I am I, me, myself – and hence looking for a new share on a regular basis is tough. Pretty tough.
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